Edited version of private ruling

Authorisation Number: 1011862793778

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Ruling

Subject: Assessability of compensation payment

Question:

Is the lump sum amount you received assessable as ordinary income?

Answer:

No.

Question:

Can you disregard any capital gain or loss that has resulted from the payment that you received?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts

You sustained an injury at a food market.

The injury was caused due to a slip/fall while present at the market.

As a result of the accident you sustained an injury.

The injury resulted in you undertaking a medical procedure.

You submitted a notice of claim for compensation.

A settlement was agreed to.

You received an un-dissected lump sum amount in full and final settlement of all and any claims against the insured and the insurer as a result of the injury that you incurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 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

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 have not earned the lump sum payment as it does not directly relate to services performed, rather to personal injury that you have receive during a slip/fall at a market. 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 legal action being taken in regards to the injury that you have incurred, rather than from a relationship with personal services performed.

Accordingly, the lump sum payment is not considered ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Capital gains tax (CGT)

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 Income tax: capital gains: treatment of compensation receipts: discusses the Commissioner's view on the treatment of compensation receipts. Taxation Ruling TR 95/35 provides that a 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 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 you have suffered.

In your case, you have received an un-dissected lump sum compensation payment. Although the payment is in relation to the disposal of an asset, which is your right to seek compensation, any capital gain or loss will be disregarded under paragraph 118-37(1)(b) of the ITAA 1997 as the compensation relates to an injury that you have incurred.

Further information

In your application you have stated that you received payments from Centrelink that were included in your income tax return as assessable income for the 2006-07 income year. Further, as a condition of the compensation settlement you were required to repay Centrelink for the payments that you received from them. The repayments that you have made have effectively reduced your assessable income for the 2006-07 income year. Therefore you are entitled to request an amendment to your 2006-07 assessment to exclude the repayments that have been made to Centrelink, therefore reducing your income tax liability.

Your entitlement to request an amendment of your 2006-07 income assessment is not altered by the compensation payment that you have received. Please note in order to request an amendment of your 2006-07 income tax assessment, you will be required to request an 'Extension of time' (EOT) to lodge an objection.