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Edited version of your written advice
Authorisation Number: 1012737469215
Ruling
Subject: Assessable income
Question 1
Does the compensation payment you received form part of your assessable income?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You received a victims of crime compensation payment.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
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 taxpayer includes income according to ordinary concepts.
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, expected, relied upon and have an element of periodicity, recurrence or regularity.
In your situation the payment was made to you as a result of a personal wrong. The payment was not earned by you as it does not relate to services performed. 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 does not arise from a relationship to personal services performed.
Accordingly, the payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.
Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.
As the amount received is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a capital gains tax (CGT) event happening to the right to seek compensation.
However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you ... suffer personally'. As such, CGT implications with regards to the payment are disregarded.
The compensation payment you received is not assessable income.