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Ruling

Subject: Compensation payment - personal injury

Question 1:

Is the compensation payment you will receive for a non-work related injury under a Group Income Protection policy assessable income?

Answer:

No

This ruling applies for the following period

Year ending 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You suffered a personal injury.

The injury did not prevent you from working in any capacity.

Your employer has a Group Income Protection policy for employees.

You lodged a claim with the insurer through your employer.

Your claim was accepted under the policy. The payment does not replace lost earnings.

The insurer has remitted a lump sum payment to your employer to be distributed to you.

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 102-5 and

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 an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has been held to include income from providing 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 or relied upon

· have an element of periodicity, recurrence or regularity

· replace income.

The lump sum you will receive is not earned as it does not 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 the pain, suffering and medical treatment required resulting from the injury, rather than from a relationship to personal services performed.

A compensation amount normally assumes the nature of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount, then it will be regarded as a capital receipt and not ordinary income.

Accordingly, the settlement amount is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997

Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. Section 102-5 of the ITAA 1997 provides that assessable income includes net capital gains for the income year. However, a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally is disregarded, paragraph 118-37(1)(b) of the ITAA 1997.

Accordingly, the settlement amount you will receive is not assessable as statutory income under section 6-10 of the ITAA 1997.

As the settlement amount you will receive for your injury is not assessable as either ordinary income or statutory income, no part of it is included in your assessable income.