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Edited version of your private ruling
Authorisation Number: 1012532989369
Ruling
Subject: Taxation of compensation payment
Question
Is the lump sum compensation payment you received included as assessable income?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You suffered a work related injury. You made a claim for compensation related to a permanent impairment.
Your employer has accepted your compensation claim and determined that you have a permanent impairment. Your employer has paid you a lump sum in accordance with the relevant legislation.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Subsection 6-15(1)
Income Tax Assessment Act 1997 Paragraph 118-37(1)(a)
Reasons for decision
Subsection 6-5(2) 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, and
· have an element of periodicity, recurrence or regularity.
The lump sum payment you accepted was not earned as it does not relate to services performed. The payment was a one off payment and 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, you have suffered as a result of the injury, rather than from a relationship to personal services.
Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However no component of the lump sum amount you are negotiated was received to compensate for loss of income. The lump sum related to the loss of physical abilities and permanent impairment.
Accordingly, no part of the lump sum compensation payment is assessable under section 6-5 of the ITAA 1997 as ordinary income.
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.
Compensation amounts received that can not be directly attributable to loss of income will usually be capital in nature and potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.
However, subsection 118-37(1)(a) of the ITAA 1997 provides that a taxpayer may disregard any capital gain arising from the receipt of compensation paid as a result of an injury suffered in their occupation.
In your case, you suffered a percentage of whole person impairment. As a result, you can disregard any capital gain arising from the payment of the lump sum amount.