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Edited version of your private ruling
Authorisation Number: 1012461176643
Ruling
Subject: Compensation payment
Question
Is the compensation payment awarded to you for a workplace injury 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 an injury in the course of your employment.
You pursued a workplace injury claim against your employer.
The insurer and your employer have agreed under a deed of agreement to settle your claim.
You are to receive a lump sum payment for any loss of earning capacity arising from your injury.
In acceptance of the payment you will give up your right to be paid for any future compensation in relation to your disability.
You have provided a copy of the deed of agreement.
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.
In your case, you suffered an injury at your work place. You are to receive a compensation payment for loss of earning capacity from the physical and mental injuries under your claim.
The lump sum payment you are to receive is not income from rendering personal services, income from property or income from carrying on a business.
The payment is also not earned, expected, relied upon and is a one off payment and thus it does not have an element of recurrence or regularity.
The amount paid for loss of earnings is a payment for diminished capacity to earn income rather than the actual loss of income. The capacity to earn is a capital asset and compensation for the loss of a capital receipt is not ordinary income.
As such, the settlement amount you receive is not assessable as ordinary income 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.
Accordingly, the settlement amount you receive is not assessable as statutory income under section 6-10 of the ITAA 1997.
As the settlement amount you receive is not assessable as either ordinary income or statutory income, no part of it is included in your assessable income.