Edited version of your written advice

Authorisation Number: 1012906822793

Date of advice: 4 November 2015

Ruling

Subject: Lump sum compensation payment

Question 1

Is the lump sum payment you received assessable as ordinary income?

Answer

No.

Question 2

Is the lump sum payment you received assessable as a capital gain?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 2015.

The scheme commenced on

1 July 2014

Relevant facts and circumstances

You have received a lump sum compensation payment. The break-up of the payment was not disclosed however it was for injury pain and suffering, and medical costs, reduction in capacity to undertake everyday tasks now and into the future, past and future economic loss.

Amounts were deducted from the lump sum payment for Legal fees, Medicare payments, and Centrelink payments.

You have provided a copy of your Statement of Claim.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-37

Reasons for decision

Ordinary income

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.

You were involved in an accident and as a result suffered injuries. You have now received a lump sum payment for pain and suffering, future medical treatments and loss of income now and into the future. The payment was not earned by you as it does not relate to services performed. The payment is also a one off payment and thus it 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, suffering and medical treatment required resulting from the injury, rather than from a relationship to personal services performed.

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

Capital gain

Section 104-25 of the ITAA 1997 indicates that a CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends by the asset being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, forfeited or expiring.

The right to seek compensation is an asset for CGT purposes. Subsection 104-25(2) of the ITAA 1997 indicates that the right to seek compensation is acquired at the time of occurrence of the breach of contract, personal injury or other compensable damage or injury. The right to seek compensation is disposed of when a court order is made or an out of court settlement is reached. It is not relevant when the payment is received.

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

In this case, paragraph 118-37(1)(b) of the ITAA 1997 will apply. Therefore, the compensation is not assessable income by virtue of the CGT provisions.