Edited version of private ruling

Authorisation Number: 1011780847584

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Ruling

Subject: lump sum payment

Question

Is the compensation payment you received assessable income?

Answer: No

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

As a result of treatment received at a health service you sustained additional injury.

You allege that the additional injury was due to negligence.

An agreement was reached between you and the health service to settle your claim by way of a Deed of Release.

You were paid a lump sum inclusive of legal costs and disbursements. The sum is inclusive of any amount owing to Medicare, Department of Social Security or otherwise.

In consideration of the sum you release and discharge all actions, suits, claims, demands and causes of action both at law and in equity against the health service.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 6-15.

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

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

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.

In your case you did not earn the lump sum payment as it does not relate to services performed. The payment is also a one-off payment and thus 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 settlement of a personal injury claim, rather than from a relationship with personal services performed.

Any part of a lump sum compensation amount will only be assessable as ordinary income:

(a) if the payment is compensation for loss of income only, or

(b) to the extent that a portion of the lump sum is identifiable and quantifiable as compensation for loss of income.

No part of your undissected lump sum can be separately identified as being compensation for loss of income.

It is concluded that the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Taxation Ruling TR 95/35 indicates that settlement of a personal injuries claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the losses arising from the injury suffered.

The disposal of an asset gives rise to a capital gains tax (CGT) event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards the payments or receipts where the amount relates to compensation or damages received for any wrong, injury or illness a taxpayer or their relative suffered.

The lump sum payment you received for personal injury is not assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. The lump sum is also disregarded from CGT by the operation of paragraph 118-37(1)(b) of the ITAA 1997. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income.