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Ruling

Subject: Lump sum compensation - permanent impairment from injury

Relevant facts and circumstances

You were injured at work.

You received a lump sum payment in respect of permanent impairment from injury.

As a result of accepting the payment, you gave up the right to seek compensation for the losses arising from the injury suffered.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5(2).

Income Tax Assessment Act 1997 Subsection 6-15(1).

Income Tax Assessment Act 1997 Section 6-20.

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Paragraph 118-37(1)(a).

Reasons for decision

Subsection 6-5(2) of the 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

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.

The lump sum payment you received does not have the characteristics of income. Therefore the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Statutory income

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 is 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 the taxpayer's 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.

Consequently no part of the amount received is included in your assessable income.