Edited version of private ruling

Authorisation Number: 1011801214976

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Ruling

Subject: Compensation Payment

Question:

Do you need to declare the settlement payment you received for pain and suffering and future treatment, in your tax return?

Answer: No

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances:

In the 2008/09 income year you were involved in a motor vehicle accident.

The other driver was allegedly under the influence.

You were not seriously injured but you still have ongoing medical problems.

Your car was written off.

You received a settlement payment from the insurance authority to compensate you for pain and suffering. You also received additional payment for future treatment.

By accepting this payment you released the insurance authority from all actions, proceedings, claims and cost of damages now or at any time in the future.

Reasons for decision

Ordinary income

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 3 categories of receipts, namely receipts from rendering personal services, receipts from property and receipts 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 assessability of a compensation payment depends upon consideration of all the circumstances surrounding it. It is the character of the receipt in the hands of the recipient that must be determined. In determining the character of a receipt, what most often has to be decided is whether it has the character of income or a capital receipt. In the case of a one off payment, this distinction will arise from consideration of whether the receipt is to replace lost income or is for the loss or impairment of income earning capacity. The former will result in income, the latter capital.

Taxation Ruling IT 2193 deals with the issue of compensation for loss of earning capacity (also known as loss of chance) arising from a motor vehicle accident. IT 2193 makes it clear that compensation for loss of earning capacity will not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the taxpayer would have earned.

In addition medical expenses are private expenditure. Therefore, payment for future medical expenses does not give rise to assessable income.

The compensation payment you received was awarded in respect of the cost of treatment for pain and suffering and is not assessable under section 6-5 of the ITAA 1997 as it is not intended to compensate for losses of an income nature.

Capital gains tax (CGT) consequences

Compensation payments resulting from personal injury represent a disposal of an asset for CGT purposes, being your right to sue. The disposal of an asset gives rise to a CGT event (section 104-35 of the ITAA 1997).

However, Taxation Ruling TR 95/35 provides that a capital gain made from a CGT event which relates directly to compensation or damages received for any wrong, injury or illness suffered by a person or a relative of that person is disregarded for CGT purposes, (paragraph 118-37(1)(b) of the ITAA 1997).

Accordingly, your compensation payment received for injuries suffered in a motor vehicle accident is exempt from capital gains tax under subsection 118-37(1) of the ITAA 1997.

Conclusion

The settlement payment you received is not assessable as ordinary income nor does it give rise to capital gains tax.

Therefore, the one off compensation payment that you received from the insurance authority does not need to be declared in your tax return.