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Edited version of your written advice
Authorisation Number: 1013056209763
Date of advice: 16 August 2016
Ruling
Subject: Compensation - WA Workcover
Question and answer
Is any part of your lump sum payment assessable as ordinary income or as a capital gain?
No.
This ruling applies for the following periods:
Year ended 30 June 2016
The scheme commenced on:
1 July 2015
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You sustained compensable disabilities said to have arisen from your employment.
You have lodged a worker's compensation claim and a common law claim with the District Court of Western Australia.
You have agreed to settle the worker's compensation claim and the common law claim.
Payment of the settlement sum is in full and complete discharge of present and future claims in respect of or arising out of the injury and/or accident, including weekly payments of compensation and medical and other expenses.
You received a lump sum payment for personal injury arising from your employment.
You have received a letter from the Director of Workcover WA confirming approval of the agreement.
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 of the Income Tax Assessment Act 1997 (ITAA 1997)
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.
The lump sum payment is not considered to be ordinary income.
Capital gains tax
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.