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Edited version of your written advice
Authorisation Number: 1051191185664
Date of advice: 16 February 2017
Ruling
Subject: Lump Sum Payment
Question 1
Is your Lump Sum payment considered assessable income?
Answer
Yes
This ruling applies for the following period(s)
Year ending 30 June 2017
The scheme commences on
1 July 2016
Relevant facts and circumstances
You were employed
Your employer did not have a Trauma Insurance policy in place at the time of your diagnosis.
A certificate of currency is not available to substantiate Trauma Insurance cover.
You were diagnosed with a condition.
You commenced negotiations with your employer seeking payment for a trauma event.
You commenced treatment for your condition.
A Lump sum payment was made by your employer calculated based on a percentage of your wage for a period of time.
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 118-37
Reasons for decision
Subsection 6-5(2) of the ITAA 1997 states that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Ordinary income is income according to ordinary concepts which is not specifically defined in the legislation.
However, characteristics of ordinary 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.
Payment for personal services, whether received in the capacity of an employee or otherwise in connection with employment or other personal services income is income according to ordinary concepts. Similarly, any payment (for example compensation) to replace income is also considered to be income for ordinary concepts.
A compensation amount generally bears the character of that which it is designed to replace. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts, whether or not they are paid as a lump sum for a given period of time. The payment takes on the nature of ordinary income, and as such, is taxable.
Lump sum payments received as a payment of a Trauma insurance policy is not income according to ordinary concepts and not assessable under section 6-5 of the ITAA 1997.
Where an amount of income is not ordinary income it may be included in a taxpayer's assessable income under section 6-10 of the ITAA 1997. This income is called statutory income and is made assessable by a specific provision of the taxation legislation.
Section 118-37 of the ITAA 1997 specifically excludes compensation or damages received for any wrong, injury or illness you or a relative suffers personally. Thus, a lump sum payment received from a trauma insurance policy is not statutory income and no capital gain will occur.
Application to your circumstances
We acknowledged that your circumstances are challenging. The Commissioner's role is to administer the legislation as passed by the government and decided through judicial process, we cannot comment on the fairness or otherwise of legislation. As regard to your circumstances there is no discretion to treat your case differently under the current legislation.
The Lump sum payment you received was not as a result of a payment from a current Trauma Insurance policy. You refer to ATO ID 2004/942 however this decision do not apply in these circumstances, as the payment received was not from an insurance policy being in place at the time of your diagnosis.
In your case, your employer did not have an insurance policy in place at the time of your diagnosis. Your employer made a payment to you based on a calculation of a percentage of your salary for a period of time. The payment you received is compensation for loss of income. Payments to replace income are considered to be assessable under section 6-5 of the ITAA 1997 and are assessable in the financial year in which it is received.