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Ruling

Subject: Compensation payment

Question

Is the portion of your compensation payment described as 'loss of earnings' assessable income?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You received an injury.

As a result, you were unable to undertake your usual employment and therefore, impairment of earning capacity due to you sustaining an injury for a period of time.

This ended in resigning from your position of employment.

The incident was not work related and therefore you were not eligible for Workers Compensation.

You applied for assistance under a Government assistance scheme.

Your claim was successful and you received a compensation payment.

A lump sum payment was made to you which included a component for loss of earnings.

You have provided a copy of the notice of decision made that specifies how the amount was calculated.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

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:

o are earned

o are expected or relied upon

o have an element of periodicity, recurrence or regularity

o replace income.

Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.

You received a compensation payment which included a component for loss of earnings. As the compensation amount was paid for loss of earnings, it is assessable as ordinary income under section 6-5(2) of the ITAA 1997 in the income year it was received.