Edited version of your written advice

Authorisation Number: 1012879198295

Date of advice: 16 September 2015

Ruling

Subject: Assessability of lump sum compensation payment

Question

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

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

You suffered a work-place injury in the 20XX year.

As a result you have a permanent impairment.

Your insurer has offered to settle your workers compensation claim with a lump sum payment for the impairment and future medical expenses.

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

Summary

The lump sum settlement payment you received does not form part of your assessable income.

Detailed reasoning

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 a lump sum payment for an injury suffered at work and future medical expenses. 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 lodgement of a worker's compensation claim, 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.