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Edited version of your written advice
Authorisation Number: 1013026178473
Date of advice: 31 May 2016
Ruling
Subject: Compensation payment
Question 1
Will the lump sum compensation payment that you received for damages arising from injuries sustained in an accident at work be included in your assessable income?
Answer
No.
Question 2
Will the lump sum compensation payment that you received for damages arising from injuries sustained in an accident at work be included be subject to capital gains tax?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You suffered a workplace injury.
You were offered a settlement sum representing both pecuniary loss and pain and suffering damages.
Acceptance of the offer has released and forever discharged the release of all present and future claims.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-10.
Income Tax Assessment Act 1997 Section 15-30.
Income Tax Assessment Act 1997 Section 102-5.
Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).
Reasons for decision
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.
A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.
In your case you received a compensation payment that is not income from rendering personal services, income from property or income from carrying on a business.
The payment is a one-off payment and 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 and suffering resulting from the injury, rather than from a relationship to personal services performed.
Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. No component of your lump sum payment was to compensate for loss of income.
Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997 in the relevant financial year.
Capital gains tax arising from the compensation payment
Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.
Section 15-30 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.
However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally.
Accordingly, the compensation payment you received is not assessable under either section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997.