Edited version of your private ruling

Authorisation Number: 1012168882266

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Taxation of compensation payments

Question 1 and Answer

Are the weekly compensation payments you receive from Comcare as a result of the work-related death of one of your parents, assessable income for income tax purposes?

Yes.

Question 2 and Answer

Is the lump sum compensation payment you received from Comcare as a result of the work-related death of your parent assessable income for income tax purposes?

No.

Question 3 and Answer

Will any capital gain arising from the lump sum compensation payment you received from Comcare be disregarded?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2010

Relevant facts and circumstances

One of your parents died as the result of a work related occurrence. Following the death a claim was lodged on your behalf for compensation under the Safety, Rehabilitation and Compensation Act 1998 (SRC Act).

You were entitled to receive a lump sum payment under section 17(3) of the SRC Act, as it was accepted that you were a dependant of your parent.

You were also entitled to receive weekly payments under section 17(5) of the Act as you were, and still are, a 'prescribed child' under section 4 of the SRC Act.

Section 4 of the SRC Act defines 'prescribed child' as:

(a) a person under 16, or

(b) a person who:

· is 16 or more but under 25;

· is receiving full-time education at school, college, university or other educational institution; and

· is not ordinarily in employment or engaged in work on his or her own account.

You received a lump sum payment from Comcare which was placed in trust for you.

Weekly payments were also paid to you.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 section 102AC

Income Tax Assessment Act 1936 section 102AE

Income Tax Assessment Act 1997 section 6-5(2)

Income Tax Assessment Act 1997 section 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.

Weekly compensation payments

In your case, the weekly payments you have been receiving are not from rendering personal services, income from property or income from carrying on a business. However, although these payments have not been earned, they are received regularly and can be said to be expected and relied upon. In other words, the weekly payments have most of the characteristics of assessable ordinary income.

In addition, Taxation Determination TD 92/133 Income tax: who is assessable on weekly payments made under subsection 17(5) of the Commonwealth Employees Rehabilitation and Compensation Act 1988 (CERCA)? Does Division 6AA of Part III of the Income Tax Assessment Act 1936 (ITAA) apply? considers that weekly compensation payments are received in the form of pension income which is taxable in the same way as salary and wages income is taxable.

Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) provides that certain income of taxpayers under 18 years of age can be taxed at the highest marginal tax rate. However, income classified as salary and wages income is exempt from the higher tax rate and is taxed at the usual tax rates applying to taxpayers over the age of 18 years.

Therefore the weekly compensation payments you receive are assessable as ordinary income and are taxable at the usual marginal tax rates applying to taxpayers over the age of 18 years.

Lump sum compensation payment

In your case, the lump sum payment you 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.

Therefore the lump sum 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 Income tax: capital gains: treatment of compensation receipts (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, section 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.

Conclusion

The lump sum compensation payment you received will not be subject to income tax however the weekly payments you receive will be subject to income tax.