Edited version of your written advice

Authorisation Number: 1013081715767

Date of advice: 31 August 2016

Ruling

Subject: Lump sum compensation payment

Question

Is the lump sum compensation payment you received assessable income?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2017

The scheme commences on

1 July 2016

Relevant facts and circumstances

You are a salaried employee.

As an employee, you are covered under your employer's insurance policy. You are not required to pay any fee or premium to be a member of your employer's plan.

The policy covers a number of different benefits and provides for different types of payments depending on the nature of the event and the other relevant circumstances.

You sustained a non-work related injury.

You were required to undergo treatment in relation to your injury. You continued to receive your normal salary/remuneration during this period and returned to work, performing your normal duties.

You submitted a claim through your employer's policy of insurance. This benefit is only paid once for an insured member.

A benefit may be payable when an insured member is diagnosed by a medical practitioner as suffering from one of the events listed in the policy as a result of an injury, and is payable without any waiting period even if the insured member continues to work and/or continues to receive their normal salary/remuneration.

The insurer accepted the claim and you received a lump sum payment.

The insurer considers the claim as finalised on payment of the benefit and you have no further entitlements payable under the specific injuries benefit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

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

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.

In your case, the lump sum payment you received is not earned; it is a one-off payment and does not have an element of recurrence or regularity. Although the payment may be said to be expected, and perhaps relied upon, this expectation arose from a personal injury that you suffered, rather than from a relationship to income earning activities.

Accordingly, the lump sum payment is not considered ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

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.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts, 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 (namely, the right to sue).

The disposal of an asset gives rise to a CGT event. However, subparagraph 118-37(1)(a)(ii) 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 lump sum payment is not assessable as either ordinary or statutory income and you are not required to include this amount in your income tax return.