Edited version of your written advice

Authorisation Number: 1012784187100

Ruling

Subject: Compensation payment

Question 1:

Is the specific injury benefit payment you received assessable income?

Answer:

No

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts

You are an employee.

Your employer holds a salary continuance plan with financial institution (the insurer).

You suffered an injury.

Your employer lodged a claim against the policy.

The insurer has accepted your employer's claim for injury.

You received a lump sum payment.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 25(1).

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Subsection 6-10(4).

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). 

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.

A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. 

Taxation Ruling IT 2193 deals with the issue of compensation for the loss of earning capacity arising from a motor vehicle accident. IT 2193 makes it clear that compensation for loss of earning capacity will not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the taxpayer would have earned.

In your case you received a specific injury benefit payment that is not income from rendering personal services, income from property or income from carrying on a business. 

The payment is 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 and suffering resulting from the injury, rather than from a relationship to personal services performed.

Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. No component of your lump sum payment was to compensate for loss of income.

Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

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.

Section 15-30 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.

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

Accordingly, the specific injury benefit payment you received is not assessable under either section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997.