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Edited version of your written advice
Authorisation Number: 1012844815429
Date of advice: 22 July 2015
Ruling
Subject: Assessability of ex-gratia payment
Question
Does the ex-gratia payment you will receive as compensation for alleged pain and suffering form part of your assessable income and is therefore subject to tax?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
As part of the settlement of a complaint with your employer, they have offered you an ex-gratia payment as compensation for alleged pain and suffering arising out of, or in connection with your employment.
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 will receive an ex-gratia payment as compensation for alleged pain and suffering. 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.
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. As the ex-gratia payment is for alleged pain and suffering, it is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. Consequently the ex-gratia 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 and is not subject to tax.