Edited version of your written advice

Authorisation Number: 1012831650723

Date of advice: 29 June 2015

Ruling

Subject: Assessability of a lump sum compensation payment

Question

Does the lump sum payment you received form part of your assessable income?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

You were employed.

You suffered injuries and submitted compensation claims.

Your employer rejected the claims and they became the subject of disputes.

You and your employer entered into a deed whereby

• your employer would pay you a lump sum amount for pain and suffering, past medical expenses, retraining and rehabilitation costs and all legal costs and disbursements

• you agreed to resign from your employment, and

• you were not entitled to any back-pay of income maintenance, interest or compensation for lost income in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5(2)

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 118-37 (1)

Reasons for 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 the 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.

You have received a lump sum payment for pain and suffering, medical costs, rehabilitation and retraining costs, legal costs and disbursements. You have not earned this payment as it does not directly relate to services performed. The payment is also a one off payment and does not have an element or recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the legal action taken, rather than a relationship with personal services performed.

Therefore, the lump sum payment is not ordinary income and is not assessable under subsection 6-5(2) of the ITAA 1997.

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 which is not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.

Taxation Ruling TR 95/35 deals with the capital gains tax 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.

In your case as the payment received is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from capital gains tax (CGT) event C2 happening to your right to seek compensation.

However, paragraph 118-37(1)(a) 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 in your occupation. Accordingly, any capital gain made from the CGT event happening to your right to seek compensation is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. Consequently the lump sum payment 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.

As the lump sum payment is neither ordinary income nor statutory income, it does not form part of your assessable income.