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Edited version of your written advice
Authorisation Number: 1051293574963
Date of advice: 10 October 2017
Ruling
Subject: Lump sum compensation payment
Question and answer
1. Is the lump sum payment received in respect of the death of your spouse, assessable income?
No.
2. Is the lump sum payment received in respect of the death of your spouse, assessable as a capital gain?
No.
This ruling applies for the following periods:
Year ended 30 June 2016
The scheme commenced on:
1 July 2015
Relevant facts and circumstances
You are an Australian resident for tax purposes
You received a lump sum compensation payment of $ after the death of your spouse.
The compensation payment was paid to you by an insurer on behalf of your spouse’s employer.
The claim was considered under the Act in respect of a disease resulting in death.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 118-37.
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-10.
Income Tax Assessment Act 1997 Section 995-1.
Reasons for decision
Assessable income
Subsection 6-5(2) of the Income Tax Assessment Act1997 (ITAA 1997) states that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, 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.
The assessability of a compensation payment depends upon a consideration of all the circumstances surrounding it.
Payment for personal services, whether received in the capacity of an employee or otherwise in connection with employment or other personal services is income according to ordinary concepts. Similarly, any payment (for example compensation) to replace income is also considered to be income according to ordinary concepts.
The payment you will receive is to be made in full satisfaction and discharge of all actions in respect of the employment and death of your spouse.
The payment does not have the characteristics of ordinary income. It was not earned by you and was not a payment for any personal services provided. Further to this, the payment did not seek to compensate for any loss of earnings which would have otherwise been assessable as ordinary income. It was paid in order to compensate loss of your late spouse and as a one-off payment it has no element of periodicity, recurrence or regularity.
The compensation payment is therefore not income according to ordinary concepts and therefore not assessable under section 6-5 of the ITAA 1997.
Capital gain
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.
Receipt of a lump sum payment may give rise to a capital gain (a statutory income), as a right to seek compensation is an asset for capital gains tax (CGT) purposes and the cancellation or surrendering of such a right is a CGT event.
However, a capital gain made from a CGT event which relates directly to compensation or damages received for any wrong, injury or illness suffered by a person or a relative of that person is disregarded for CGT purposes, (paragraph 118-37(1)(b) of the ITAA 1997).
'Relative' is defined under section 995-1 of the ITAA 1997 as:
● a person's spouse
● the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendent or adopted child of that person or of that person's spouse; or
● spouse of a person referred to in paragraph (b).
In your case, the compensation payment was made to you as the spouse of the deceased and therefore falls within the definition of a 'relative'. The payment is directly related to the loss of your spouse, and as such the payment will be exempt from capital gains tax under paragraph 118-37(1)(b) of the ITAA 1997.
Accordingly, the payment will not be assessable as a capital gain.