Edited version of your written advice

Authorisation Number: 1012781184034

Ruling

Subject: Lump sum payment

Question

Is the lump sum compensation payment you received included in your assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You received injuries at work while an employee.

You made a compensation claim seeking payments of compensation for injuries which occurred at work.

Entity A agreed to make a lump sum payment to you in full and final discharge of all and any claims against entity A including claims under certain sections of the relevant legislation.

No amount of the compensation related to loss of income.

You resigned from your employment.

You received your lump sum in the 2014-15 financial year.

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 6-15.

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

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 includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income form 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.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82).

Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

Damages awarded for past or future loss or impairment of earning capacity is not ordinary income (Groves v. United Pacific Transport Pty Ltd [1965] Qd R 62). The capacity to earn income is a capital asset and compensation for the loss of a capital asset is a capital receipt and is not ordinary income.

Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation/settlement payment is assessable, and states that such a payment is assessable income:

• if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined), or

• to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.

In your case, no component of your lump sum related to loss of income. Rather it related to medical expenses, injuries and non-economic loss.

The lump sum payment you received is not earned by you as it does not relate to services performed. The payment is also a one-off payment and thus 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 your personal injury and claim submitted, rather than from a relationship with personal services performed.

As no component of the amount you received was to compensate you for loss of income, the amount is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Statutory income

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Amounts received in respect of personal injury is generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

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

In your case, paragraph 118-37(1)(b) of the ITAA 1997 applies. This means that the compensation you received is not included in your assessable income under the CGT provisions.

The compensation payment you received is not ordinary income and is not statutory income. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount you received is included in your assessable income.