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Ruling
Subject: Compensation payment - personal injury
Question
Is the compensation payment you received for injuries assessable income?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commences on:
I July 2010
Relevant facts and circumstances
You suffered an injury at the house you were renting.
You pursued a personal injury claim against the owners of the house and the real estate agent who managed the house.
Your claim was successful and you received a compensation payment.
You were away from your normal paid work for a period of time.
You were not advised of what the compensation was made up of but you know that the payment was to cover pain, suffering, medical treatment and loss of earnings.
Under the settlement you received a lump sum payment less payments to Medicare, private health and payments for legal counsel and lawyers.
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)
Detailed reasoning
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has been held to include income from providing 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 or relied upon
· have an element of periodicity, recurrence or regularity
· replace income.
A compensation amount normally assumes the nature of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount, then it will be regarded as a capital receipt and not ordinary income.
Medical expenses are private expenditure and therefore, an amount paid to cover this type of expenditure is not assessable income.
In your case, the personal injury amount was not earned as it does not relate to services performed. The payment is also a one off payment and therefore it does not have the element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from pain, suffering and medical treatment required resulting from the injury, rather than from a relationship to personal services performed.
The amount paid for past loss of earning capacity is a payment for diminished capacity to earn income rather than the actual loss of income. The capacity to earn is a capital asset and compensation for the loss of a capital receipt is not ordinary income.
As such, the settlement amount you received is not assessable as ordinary income under section 6-5 of the ITAA 1997.
Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. Section 102-5 of the ITAA 1997 provides that assessable income includes net capital gains for the income year. However, a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally is disregarded, paragraph 118-37(1)(b) of the ITAA 1997.
Accordingly, the settlement amount you received is not assessable as statutory income under section 6-10 of the ITAA 1997.
As the settlement amount you received is not assessable as either ordinary income or statutory income, no part of it is included in your assessable income.