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Edited version of your written advice
Authorisation Number: 1051337089556
Date of advice: 15 February 2018
Ruling
Subject: Compensation payment
Question
Is the payment received for damages due to personal injury treated as assessable income?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 20XX
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
You began employment with Employer A in 20XX
During your probation period you received approval to work from home for a period of 3 weeks and an additional leave without pay for 2 weeks
You returned to work late 20XX and met your new manager
Due to the interactions between the manager and yourself, a complaint was lodged regarding the violation of your rights
As a result of the complaint and the subsequent mediation conference a settlement agreement was reached and you withdrew the complaint.
Employer A agreed to pay you damages for personal injury in addition to your Employment Termination Payment
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 102-5
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes income according to ordinary concepts.
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.
The lump sum payment that the taxpayer received was not earned by the taxpayer as it does not relate to services performed. The payment is also a one off payment and thus it does not have an element of recurrence or regularity.
Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the mental injury and medical treatment required resulting from the injury, rather than from a relationship to personal services performed.
Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However no component of the amount received as damages was compensation for loss of income.
Therefore, the payment is not ordinary income and not assessable under Section 6-5 of the ITAA 1997.
Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.
Amounts received in respect of personal injury which is not direct compensation for loss of income will usually be capital in nature. Any net capital gain arising from the receipt, worked out in accordance with the CGT provisions of the ITAA 1997, is potentially assessable under section 102-5 of the ITAA 1997 as statutory income.
Taxation Ruling TR 95/35 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.
As the amount received by the taxpayer is not in respect of any underlying asset, the whole of the lump sum payment is treated as capital proceeds from a CGT event happening to the taxpayer's right to seek compensation.
However, subparagraph 118-37(1)(a)(ii) of the ITAA 1997 disregards a capital gain made from a CGT event relating directly to compensation or damages received for any 'wrong, injury or illness you suffer personally'.
Accordingly, the lump sum payment received by the taxpayer for mental injury and medical expenses is not assessable under either section 6-5 or section 102-5 of the ITAA 1997.
Other references (Non ATO view – example court cases, etc):
N/A
Does Part IVA or any other anti-avoidance provision apply to this ruling?
The application of Part IVA of the ITAA 1936 has not been considered as this topic is in the SBIT low risk PART IVA list as specified in ORCLA.