Edited version of private ruling

Authorisation Number: 1011660970604

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Ruling

Subject: Assessability of compensation payment

Is the lump sum compensation payment you received included in your assessable income?

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

The scheme commenced on:

1 July 2009.

Relevant facts:

You suffered permanent hearing loss as a result of your employment.

You lodged a claim for compensation and were awarded a lump sum amount for impairment of hearing.

No component of the lump sum amount was related to a loss of income.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 118-37.

Reasons for decision

Assessable income - general

The assessable income of a Australian resident taxpayer may include amounts of ordinary and statutory income.

Salary and wages are an example of ordinary income and are included in a taxpayer's assessable income under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Capital gains are an example of statutory income and are included in a taxpayer's assessable income under the provisions of section 102-5 of the ITAA 1997.

Assessability of compensation payments

Compensation payments which are a substitute for income (salary and wages for example) have been previously held by the courts to be assessable as ordinary income (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142; (1989) 20 ATR 1516, Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411 and Case Y47 91 ATC 433; AAT Case 7328 (1991) 22 ATR 3422).

This position by the courts is reflected in Taxation Determination TD 93/58 which contains the Australian Taxation Office view on the circumstances in which the receipt of a lump sum compensation payment will be assessable as ordinary income in the hands of the recipient.

TD 93/58 specifies that such a payment will be assessable as ordinary income:

· if the payment is for loss of income only, or

· to the extent that a portion of the payment is identifiable and quantifiable as being related to a loss of income.

In your case, no portion of the lump sum you received was to compensate you for loss of income. Rather, the amount was paid to you as compensation you for your loss of hearing. Accordingly, no portion of the lump sum amount will be included as ordinary income in your assessable income.

Compensation amounts received that can not be directly attributable to loss of income will usually be capital in nature and potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.

However, subsection 118-37(1)(a) of the ITAA 1997 provides that a taxpayer may disregard any capital gain arising from the receipt of compensation paid as a result of an injury suffered in their occupation.

In your case, the lump sum amount was paid as a result of a work injury resulting in a loss of hearing. As a result, you can disregard any capital gain arising from the payment of the lump sum amount.

Conclusion

No portion of the lump sum amount will be included in your assessable income for taxation purposes.