Edited version of your written advice

Authorisation Number: 1013037415014

Date of advice: 21 June 2016

Ruling

Subject: Compensation payment

Question

Will the compensation payment (less the repayment) form part of your assessable income?

Answer

No.

This ruling applies for the following periods

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on

1 July 2015

Relevant facts and circumstances

You suffered a work injury.

As a result of the circumstances of the injuries, you were entitled to pursue compensation/damages claims under the relevant worker's compensation provisions and at common law for negligence.

The relevant workers compensation body paid you compensation of $X,XXX,XXX.

You were subsequently awarded a damages payment at common law and are required to repay the workers compensation body the compensation previously paid.

You will retain the balance of the damages payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 118-37

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or 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, and

have an element of periodicity, recurrence or regularity.

You have received a compensation/damages payment for an injury suffered at work. You have not earned this payment as it does not directly relate to services performed. The payment is also a one off payment and does not have an element or recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the lodgement of a worker's compensation claim, rather than a relationship with personal services performed.

Therefore, the lump sum payment is not ordinary income and is not assessable under subsection 6-5(2) of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Amounts received in respect of personal injury which is not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.

Paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any wrong, injury or illness you suffer in your occupation. Accordingly, any capital gain in relation to your compensation payment is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. Consequently the lump sum payment is not statutory income.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income.

As the lump sum payment is neither ordinary income nor statutory income, it does not form part of your assessable income.