Edited version of your written advice

Authorisation Number: 1051401546462

Date of advice: 18 July 2018

Ruling

Subject: Lump sum payment

Question

Is the lump sum compensation payment you received included in your assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commenced on

1 July 20xx

Relevant facts

You had a fall at work and sustained injuries.

You lodged a Workers’ Compensation claim.

You were notified that you had sustained a permanent impairment and would receive a lump sum compensation payment.

You received compensation in the 20xx-xx income year.

Your compensation was not for lost wages. It was paid for your specified injury under the relevant legislation.

You are still an employee with the Employer.

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 6-15.

Income Tax Assessment Act 1997 Paragraph 118-37(1)(a)

Detailed reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, 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, and

● have an element of periodicity, recurrence or regularity.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82).

Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

In your case, no amount you received was to compensate you for loss of wages or income. Your compensation payment was made under the relevant legislation for specified injuries.

The lump sum payment you received is not earned by you as it does not relate to services performed. Rather the lump sum relates to your injury. The payment is also a one-off payment and thus 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 your personal injury, rather than from a relationship with personal services performed.

Therefore the lump sum payment is not assessable income under subsection 6-5(2) of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that your 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 are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

However, subparagraph 118-37(1)(a)(i) of the ITAA 1997 disregards any capital gain or capital loss made where the amount relates to compensation or damages you receive for any wrong or injury you suffer in your occupation. Subparagraph 118-37(1)(a)(ii) of the ITAA 1997 disregards any capital gain or capital loss made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally.

In your case, paragraph 118-37(1)(a) of the ITAA 1997 applies. This means that the compensation you received is not included in your assessable income under the CGT provisions.

The compensation payment you received is not assessable as either ordinary income or statutory income, and is therefore not included in your assessable income. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income.