Edited version of your written advice

Authorisation Number: 1012917180500

Date of advice: 27 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

Year ended 30 June 2016.

The scheme commenced on

1 July 2015

Relevant facts and circumstances

You were employed.

• You lodged a claim for workers compensation.

• The claim for compensation was rejected.

• Your employment ceased and you were paid all of the statutory entitlements as a consequence of cessation of employment

• You disputed the rejection of the claim, initiating proceedings in the relevant tribunal.

• The parties agreed to resolve the issue and enter into a deed to resolve all matters between them in relation to employment, cessation of employment and the proceedings.

You will receive a lump sum compensation payment from a Deed of Settlement and Release in the relevant financial year. The break-up of the payment was not disclosed however it was for resolution of all issues between both parties including claims of work related stress disorders and legal costs. There was no component paid for economic loss.

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 a workplace incident and as a result you lodged a claim for workers compensation. You will receive a lump sum payment deed of settlement for work related stress disorders, legal costs and to resolve all matters between both of the parties. There was no component paid for economic loss.

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 to resolve all matters between both parties after the workplace incident, 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.