Edited version of your written advice

Authorisation Number: 1013059896431

Date of advice: 3 August 2016

Ruling

Subject: Compensation assessability

Question

Is the lump sum payment received by you for compensation for total and permanent disablement assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You made a claim for total and permanent disability on your employer's insurance policy, as you had been injured at work.

You have provided a copy of a letter issued by the insurance agency to your employer. The letter specifies the payment to be made to you in respect of total and permanent disablement. It advised that they accepted liability and a payment amount was made in full settlement of the claim.

The payment was made by the insurance agent to your employer.

The product disclosure statement for the insurance agent specifies that a lump sum benefit is paid to the policy owner if the insured person becomes totally and permanently disabled. It does not include a benefit for replacement of income.

In an email from your insurance agent to your tax agent it was advised that the full amount of the lump sum payment was for total and permanent disablement.

In making the insurance payment to you your employer withheld an amount of tax.

The compensation payment amount was included in your gross wages on the PAYG payment summary for the financial year.

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(1)

Income Tax Assessment Act 1997 Paragraph 118-37(1)(a)

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.

In your case the lump sum payment was not earned by you as it does not directly relate to services performed. Rather the lump sum relates to the loss of physical abilities. The payment is also a one-off payment and thus 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 investment in insurance and the pain and suffering resulting from the injury, rather than from a relationship with personal services performed. Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Amounts received in respect of personal injury, which are 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. The net capital gain you make is then included in your assessable income under section 102-5 of the ITAA 1997 unless an exemption applies.

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.

As the amount received by you is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a CGT event (CGT event C2) happening to your right to seek compensation.

However, 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'. Therefore, any capital gain made from the CGT event happening to your right to seek compensation is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. It is thus 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. Consequently no part of the gross amount you were entitled to receive is included in your assessable income.