| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051236776196
Date of advice: 19 June 2017
Ruling
Subject: Compensation
Question
Is the lump sum payment you will receive assessable as ordinary income or as a capital gain?
Answer
No.
This ruling applies for the following periods
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on
1 July 2016
Relevant facts and circumstances
You have suffered a workplace injury resulting in XX% whole person impairment.
You are entitled to a lump sum payment for non-economic loss.
The amount of the payment is depending on the percentage of whole of body impairment assessed.
Relevant legislative provisions
Income Tax Assessment Act section 6-5
Income Tax Assessment Act section 6-10
Income Tax Assessment Act section 104-25
Income Tax Assessment Act subparagraph 118 37(1)(a)(i)
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 resident taxpayer includes ordinary and statutory income (for example, capital gains) derived directly and indirectly from all sources, whether in or out of Australia during the income year
The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income, as are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts.
In your case, you are entitled to a lump sum payment for non-economic loss.
The lump sum payment has no characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity, nor is it paid to compensate for loss of income.
Therefore, the lump sum amount will be capital in nature, being a payment for the loss of body functionality in respect of your injury or injuries, and will not be assessable as ordinary income.
Statutory income
The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation.
In your case, the lump sum payment will be received as compensation for a 'wrong or injury you have suffered in your occupation’, being the loss of body functionality in respect of your workplace injury/injuries.
Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118 37(1)(a)(i) of the ITAA 1997 and the payment will not be assessable as statutory income.
As the lump sum payment is not assessable as either ordinary or statutory income, you would not be required to include the amount in your assessable income.