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Ruling

Subject: Compensation payment - personal injury

Question 1

Is the proposed lump sum compensation payment under the Safety, Rehabilitation and Compensation Act 1988 (SRCA 1988) assessable income?

Answer

No

This ruling applies for the following period

Year ending 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

You have been offered a lump sum compensation payment for whole person impairment and non-economic loss under sections 24 and 27 of SRCA 1998.

You have provided a copy of the Administrative Appeals Tribunal decision in respect 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 and

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 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.

Your compensation amount is to be paid under sections 24 and 27 of the SCRA 1988. The payment you will receive, if you choose to accept this proposal, is to compensate you for the injury and non-economic loss incurred by you.

The lump sum amount is designed to compensate for the injury and non-economic loss you sustained as a result of an injury. Compensation for personal injury has always been characterised as capital in nature and not assessable under any section of the tax legislation.

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.