Edited version of private ruling

Authorisation Number: 1011768376744

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Ruling

Subject: Compensation - pain and suffering

Question:

Is the lump sum payment received as compensation for pain and suffering damages included as assessable income?

Answer: No

Question:

Will any capital gain arising from the lump sum compensation payment be disregarded?

Answer: Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You will receive a lump sum payment from your employer for pain and suffering damages on the basis of an apprehended claim for bullying and/or harassment.

Your employer has agreed to pay an amount to cover the cost of self rehabilitation expenses.

Your employer has agreed to pay an amount for your legal costs and disbursements.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

are earned

are expected

are relied upon, and

have an element of periodicity, recurrence or regularity.

The lump sum you received was not earned as it does not relate to services performed. The payment is also a one-off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the pain and suffering as a result of bullying and/or harassment, rather than from a relationship to personal services performed.

Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.

Amounts received in respect of personal injury which are not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'.

Accordingly, the lump sum payment received by you for pain and suffering damage, and the amount received to cover legal costs are not assessable under either section 6-5 or section 102-5 of the ITAA 1997. 

Self rehabilitation expenses are private expenditure. Therefore, payment for future rehabilitation expenses does not give rise to assessable income.