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Ruling
Subject: Assessability of compensation payment
Question and answer:
Is the lump sum you received for compensation as a result of a motor vehicle accident included in your assessable income?
No.
This ruling applies for the following period:
Year ending 30 June 2012.
The scheme commenced on:
1 July 2011.
Relevant facts and circumstances
You were in a motor vehicle accident.
You were paid compensation under the relevant legislation.
The payment was made to you in the income year ending 30 June 2012.
No tax was withheld from the payment.
No component of the payment is required to be repaid to anyone.
No component was paid to replace income.
Relevant legislative provisions
Section 6-5(2) of the Income Tax Assessment Act 1997.
Subsection 6-15(1) of the Income Tax Assessment Act 1997.
Section 6-20 of the Income Tax Assessment Act 1997.
Section 102-5 of the Income Tax Assessment Act 1997.
Paragraph 118-37(1)(a) of the Income Tax Assessment Act 1997.
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 lump sum payment was not earned by you as it does not directly relate to services performed. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.
Amounts received in respect of personal injury which is not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax 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.
As the amount received by you was not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a CGT event (CGT event C2) happening to your right to seek compensation.
However, paragraph 118-37(1)(a) 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 in your occupation'. Therefore, any capital gain made from the CGT event happening to your right to seek compensation is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. It is thus not statutory income.
Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income.
Therefore, no part of the amount received should be included in your assessable income.