Edited version of your private ruling

Authorisation Number: 1012136810425

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Subject: Compensation payment - personal injury

Question

Is the lump sum payment you received for compensation for injury assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You were subjected to a series of incidents relating to abuse over a period of time.

You reported these incidents to police.

As a result you have been awarded a lump sum compensation payment for personal injury.

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 10-5,

Income Tax Assessment Act 1997 Section 102-5,

Income Tax Assessment Act 1997 paragraph 118-37(1)(b) and

Income Tax Assessment Act 1997 .

Reasons for decision

Summary

The lump sum payment you received is not considered to be ordinary income nor statutory income and is therefore not included in your assessable income.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts.

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, reoccurrence or regularity.

In your case, the lumps sum payment you received was not earned as it does relate to services 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 a personal injury you suffered, rather than from any personal services.

Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However no component of the amount you received was to compensate for loss of income.

Accordingly, the lump sum payment is not ordinary income and, therefore, not assessable under section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income also includes statutory income. Statutory income is amounts that are not ordinary income but are included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.

Amounts received in respect of personal injuries which are 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 (CGT) provisions of the ITAA 1997.

Compensation resulting from personal injury represents a disposal of an asset for CGT purposes. The disposal of an asset gives rise to a CGT event.

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.

Accordingly, the lump sum compensation payment that you received for injury due to abuse is not assessable as a capital gain under section 102-5 of the ITAA 1997.