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Edited version of your written advice
Authorisation Number: 1051238267145
Date of advice: 16 June 2017
Ruling
Subject: Lump sum compensation payment
Question 1
Is the lump sum compensation amount paid considered assessable income?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You were injured at work in 201X
You ceased work in 201Y
You lodged a compensation claim and were awarded a lump sum amount for lost income and reimbursement of medical expenses in 201Z.
An amount was withheld from the payment made to you and remitted to the ATO as an income tax withholding amount based on the portion of the lump sum awarded for loss of income.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
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.
An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 (Inkster) and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).
Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.
In your case, you received compensation for loss of income and as such the amount is considered assessable income. Accordingly the tax withheld from that income and remitted to the ATO was done so correctly.