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Ruling

Subject: Compensation payment - personal injury

Question

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

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1July 2011

Relevant facts and circumstances

You were awarded a payment for compensation.

You have provided a copy of the notice of determination that specifies an amount paid for injury.

Compensation was awarded as a result of a 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 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 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.

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.

In your case, the personal injury amount was not earned as it does not relate to services performed. The payment is also a one off payment and therefore it does not have the element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from pain, suffering and medical treatment required resulting from the injury, rather than from a relationship to personal services performed.

Therefore, the payment you are to receive for personal injury does not form part of your ordinary assessable income.

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 received is not assessable as statutory income under section 6-10 of the ITAA 1997.

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