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Ruling

Subject: taxation of lump sum compensation payment

Question 1

Are you required to pay tax on the lump sum payment you received as a result of your Comcare claim following the work-related death of your partner?

Answer 1

No.

Question 2

Will any capital gains arising from the compensation payment be disregarded?

Answer 2

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commences on

01 July 2010

Relevant facts and circumstances

Your partner died in 2011 as the result of work related occurrence. Following your partners death you claimed for compensation under the Safety, Rehabilitation and Compensation Act 1998 (SRC Act).

Your claim was settled with the payment of a statutory lump sum that is set out in section 17(3) of the SRC Act, as it was accepted that you were a dependant of your partner.

It was on this basis that your claim was settled in 2011 with a lump sum payment being made to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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, the payment you have received was not from rendering personal services, income from property or income from carrying on a business. Although the payment may have been expected and relied upon, it was not earned and was received in a lump sum.

The payment you received is not assessable as ordinary income.

Capital gains tax (CGT)

Amounts received in respect of personal injury which are not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the CGT provisions of the ITAA 1997.

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'.

Therefore, any capital gain that may arise from the receipt of the lump sum payment for injury will be disregarded.