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Edited version of your written advice
Authorisation Number: 1012896477460
Date of advice: 27 October 2015
Ruling
Subject: Compensation payment
Question and answer
Is any part of your lump sum payment assessable as ordinary income or as a capital gain?
No.
This ruling applies for the following period
Year ended 30 June 20YY
The scheme commenced on
Mid-August 20XX
Relevant facts
You were employed by your past employer for over 30 years.
You were exposed to continual hazards without proper protection.
In 20YY you were diagnosed with a medical condition.
You lodged a compensation claim for permanent impairment.
It was determined that you were entitled to:
• An amount for permanent impairment.
• An amount for non-economic loss.
You accepted the offer.
You have provided documentation regarding the settlement.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)
Reasons for decision
Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and 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
• have an element of periodicity, recurrence or regularity.
The lump sum payment you accepted is not income from rendering personal services, income from property or income from carrying on a business.
The payment is also not earned, expected, relied upon and is a one off payment and thus it does not have an element of recurrence or regularity.
The lump sum payment is not considered to be ordinary income.
Capital gains tax
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 payment or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness. The lump sum you received is considered to be exempt from CGT under paragraph 118-37(1)(b).
Conclusion
As the amount is not ordinary or statutory income it is not assessable income. Therefore no part of the settlement amount is required to be included in your income tax return.