| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012724629825
Ruling
Subject: Compensation payment
Question
Does the lump sum payment constitute assessable income?
Answer:
No
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Facts
You suffered an injury in the course of your employment.
As a result you became entitled to receive a payment under Section 98C/E of the Accident Compensation Act 1985 (ACA).
The state WorkCover Authority has calculated your entitlement on the basis of the determination of your impairment, and has determined that you are entitled to compensation non-economic loss.
You received the payment in the relevant financial year.
Reasons for our 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 an 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 offered to you by the state WorkCover Authority is not earned by you as it does not directly relate to services performed. Rather the lump sum relates to the personal injury. The payment is also a one-off payment and does not have an element of recurrence or periodicity.
Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the ACA rather from a relationship with personal services performed. As such the lump sum payment is not ordinary income and is therefore not assessable income under subsection 6-5(2) of the ITAA 1997.
Capital gains tax consequences
Section 6-10 of the ITAA 1997 provides that your assessable income also includes amounts known as statutory income. Statutory income is included in your assessable income by specific provisions of the ITAA 1997, and includes capital gains tax (CGT). If an amount is not ordinary income or statutory income it is not assessable income (subsection 6-15(1) of the ITAA 1997).
Taxation Ruling TR 95/35 indicates that a settlement of a personal injury claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the losses arising from the injury suffered.
The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(a) of the ITAA 1997 disregards payments or receipts for the purposes of CGT where the amount relates to compensation or damages a taxpayer received for any wrong, injury or illness suffered in their occupation.
In summary, the lump sum payment received by you will not be assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. The lump sum payment is also disregarded from CGT by the operation of paragraph 118-37(1)(a) of the ITAA 1997 and as a result does not constitute statutory income.