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Edited version of your private ruling
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Ruling
Subject: Assessability of compensation payment
Questions and answers:
1. Is the lump sum amount you received assessable as ordinary income?
No.
2. Can you disregard any capital gain or loss that has resulted from the payment that you received?
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 as a customer.
As a result of the injury you were required to take sick leave from your work.
You engaged legal representation and submitted a claim for compensation.
As a result of your claim you received an undissected settlement amount.
In accepting the settlement you forfeited any right of pursue any future action in relation to your claim.
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, Section 118-37
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, whether in or out of Australia, during the income year.
Ordinary income has generally been held to include 3 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.
The payment that you have received has not been earned as it does not relate to services that you have performed. The payment is also a one off payment and thus it 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 damage resulting from the injury, rather than from a relationship to personal services performed.
Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However no component of the amount received was received to compensate for loss of income.
The compensation payment that you have received is not considered to be ordinary income, and therefore not assessable under section 6-5 of the ITAA 1997.
Statutory income
Statutory income is income that is not ordinary income but is 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, under paragraph 118-37(1)(b) of the ITAA 1997, any capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally is disregarded.
Accordingly, the compensation payment you received is not assessable as either ordinary income or statutory income, and is therefore not included in your assessable income.