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Edited version of your written advice
Authorisation Number: 1012991125730
Date of advice: 31 March 2016
Ruling
Subject: TPD compensation payment
Question
Is any part of your lump sum payment assessable as ordinary income or as a capital gain?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts
You suffer from a medical condition said to have resulted from your employment.
You are a member of a superannuation fund.
The corporate trustee of the superannuation fund entered into a Group Life Insurance Policy in respect of the fund.
As a result of your condition, you made a Total and Permanent Disability (TPD) claim against your superannuation funds insurer. The claim included the contention that as a result of your medical condition you ceased employment.
Your superannuation funds insurer assessed the TPD claim and declined it by letter to the fund.
Your superannuation fund considered the fund claim and declined it by letter to your solicitor.
Your solicitor requested a review of your superannuation fund denial of the fund claim.
Your superannuation fund then requested that the insurer undertake a review of the TPD claim.
The insurer reconsidered the claim.
You filed a Statement of Claim.
Your superannuation fund and its insurer deny they are liable in any way to you in respect of with the claims and without any admission of liability they and you have agreed to resolve the claim.
Your superannuation funds insurer agreed to pay a settlement sum noted in your deed of release, in full and final settlement without admission of liability.
You accepted the offer, and agreed to a release and indemnity of your superannuation fund and its insurer from any further claim or liability in respect of this matter.
The lump sum settlement has been paid to your solicitors trust account.
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.
Your settlement is a result of you making a complaint where entitlement to receive a payment under a TPD claim was in dispute. It is not a lump sum payment which substitutes for an income stream but rather for entering into a settlement agreement with the insurer for the purpose of surrendering your rights under the policy. The lump sum payment is a capital receipt and is not ordinary income. Therefore the amount is not assessable under section 6-5 of the ITAA 1997.
Capital gains tax
Taxation Ruling TR 95/35 deals with the capital gains 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.
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.