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Edited version of your written advice
Authorisation Number: 1013041829626
Date of advice: 30 June 2016
Ruling
Subject: Assessability of lump sum compensation payment
Question
Is a lump sum workers compensation payment assessable income?
Answer
No.
This ruling applies for the following period:
01 July 2015 to 30 June 2016
The scheme commences on:
XY November 20XX
Relevant facts and circumstances
You received a lump sum worker' compensation payment from as a result of a workplace injury which was determined to be compensable.
Until late 20XX you received compensation payments to replace your income. However on this date income replacement ceased and you settled a lump sum to provide compensation for personal injury incurred during the course of your normal duties.
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 6-15.
Income Tax Assessment Act 1997 Section 15-30.
Income Tax Assessment Act 1997 Paragraph 118-37(1)(a).
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.
Your compensation 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 thus it does not have an element of 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. Compensation for personal injury and loss of earning capacity are generally regarded as being capital in nature.
In your case, the lump sum payment is made in respect to injuries suffered during your employment which affects your future income earning capacity.
Taxation Determination TD 93/58 states that any part of a lump sum compensation amount will only be assessable as ordinary income:
(a) if the payment is compensation for loss of income only, or
(b) to the extent that a portion of the lump sum is identifiable and quantifiable as income. This is possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.
The lump sum compensation payment you receive is in settlement of your injury at work.
As the lump sum payment is capital in nature it is not assessable as ordinary income under section 6-5 of the ITAA 1997.
Section 6-10 of the ITAA 1997 includes amounts of statutory income in assessable income, that is, amounts that are specifically listed as assessable income in Division 10 of the ITAA 1997. The two provisions applicable in your case are section 15-30 of the ITAA 1997 and Part 3-1 of the ITAA 1997.
Section 15-30 of the ITAA 1997 operates to include in your assessable income an amount received as insurance or indemnity for loss of an amount if the loss amount would have been included in assessable income and the amount received is not assessable as ordinary income under section 6-5 of the ITAA 1997.
Your compensation amount does not meet this description, as it is not paid for loss of earnings but in respect to your future loss of earning capacity.
Accordingly, section 15-30 of the ITAA 1997 will not apply to the compensation amount.
Capital gains tax
Taxation Ruling TR 95/35 indicates that settlement of a personal injuries claim represents the disposal of an asset, as you have disposed of the right to seek compensation for the losses arising from the injury suffered.
Part 3-1 of the ITAA 1997 contains the general capital gains tax (CGT) provisions. The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(a) of the ITAA 1997 disregards payments or receipts for the purposes of the CGT provisions where the amount relates to compensation or damages you received for any wrong, injury or illness suffered in your occupation.
The compensation amount meets this description. Paragraph 118-37(1)(a) of the ITAA 1997 will apply to the compensation amount so that any capital gain or capital loss will be disregarded.
Taxation Determination TD 93/58.
Taxation Ruling TR 93/35.
Taxation Ruling IT 2193.
ATO ID 2002/578
ATO ID 2003/707