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Edited version of your written advice
Authorisation Number: 1012783319922
Ruling
Subject: Compensation payment
Question 1:
Is the amount you received as compensation for pain and suffering included in your assessable income?
Answer:
No
Question 2:
Will any capital gain arising from the compensation payment be disregarded?
Answer:
Yes
This ruling applies for the following period:
Year ended 30 June 2015
The scheme commenced on:
1 July 2014
Relevant facts
You were a ward of a state.
You were a victim of abuse.
You intend signing an order to receive a lump sum amount.
The lump sum payment is not paid for past or future economic loss the amount was awarded for abuse suffered while you were in state care.
You will receive a lump sum payment once the order is signed.
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 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 an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
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.
In your case the payment you received was compensation for suffering caused by being a victim of crime.
The payment does not have the characteristics of ordinary income and was not earned by you and did not relate to services performed. The payment is also 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 suffering as a result of abuse while in state care.
Therefore the lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the ITAA 1997.
Capital Gain Tax
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.
Receipt of a lump sum payment may give rise to a capital gain (statutory income). However paragraph 118-37(1)(b) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness.
In your case, the payment was made to you as a result of a personal wrong, and as such the payment will be exempt from capital gains tax under paragraph 118-37(1)(b) of the ITAA 1997.
Accordingly, the lump sum payment you received for pain and suffering is not assessable under either section 6-5 or section 102-5 of the ITAA 1997.