Edited version of your private ruling

Authorisation Number: 1012476520939

Ruling

Subject: Lump sum compensation payment

Question

Is any part of the lump sum compensation payment assessable as ordinary income or as a capital gain?

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 were previously employed as a tradesman.

Whilst working as a tradesman you were exposed to hazardous materials.

You were later diagnosed with a related disease (the condition).

You commenced legal proceedings against your former employer's insurer (the first releasee) and the manufacture of the hazardous products (the second releasee).

Your claim was for personal injuries and loss and damages against the releasees.

The first and second releasees made a no admission as to liability out of court settlement. You accepted the offer.

You received the settlement funds in the 2013 financial year.

You have provided a copy of the Deed of Release.

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 10-5

Income Tax Assessment Act 1997 Section 102-5

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

Reasons for decision

Section 6-5 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

· have an element of periodicity, recurrence or regularity.

The compensation amount you received is not income from rendering personal services, income from property or income from carrying on a business. 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 condition, rather than from a relationship to personal services performed.

No component of the amount you received was received to compensate for loss of income. Accordingly, no part of the lump sum compensation payment will be assessable under section 6-5 of the ITAA 1997.

Capital gains tax arising from the compensation payment

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.

Amounts received in respect of personal injuries which are not for reimbursements 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.

However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain where the amount relates to compensation or damages received for any 'wrong, injury or illness you ... suffer personally'.

In your case, you will not be subject to capital gains tax in respect of the amount you have received.

Conclusion

As the amount is not ordinary or statutory income it is not assessable income. Therefore no part of the settlement amount is required to be included in your income tax return.