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Edited version of your written advice
Authorisation Number: 1051410982518
Ruling
Subject: Lump sum payment for personal injury
Question
Is the amount received as a lump sum compensation for personal injury assessable income?
Answer
No
This ruling applies for the following:
Period ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You commenced employment with a company in late 2010.
There were allegations made about aspects of your work life.
You supplied a medical certificate that stated you were unfit for duty due to work related stress.
You came to an agreement with your employer that you would resign your employment.
You entered into a Deed of Release with your employer that ended any claims to be made.
Your final payment consisted of (a) Payment for leave entitlements (b) Payment of a lump sum amount for damages in respect of injury.
An amount was also paid by your employer in regard to legal fees incurred by you.
Relevant legislative provisions
Income Tax Assessment Act 1997 (ITAA 1997) section 6-5
Income Tax Assessment Act 1997 (ITAA 1997) section 6-10
Income Tax Assessment Act 1997 (ITAA 1997) section 102-5
Income Tax Assessment Act 1997 (ITAA 1997) section 118-37 paragraph (1) (a)
Reasons for decision
The lump sum amount for the personal injury claim is a capital receipt and is not ordinary income. As the lump sum amount was received due to personal injury that you suffered it is exempt from taxation under paragraph 118-37(1) (a) of the ITAA 1997.
Detailed reasoning
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:
● income from rendering personal services,
● income from property
● 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.
Part of your compensation payment amount is in relation to your personal injury claim.
The amount does not meet any of the categories and therefore is not ordinary income. The payment was not earned by you 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 pain and suffering resulting from the injury, rather than from a relationship to personal services performed. Amounts received in respect of personal injury, which are not for reimbursement of medical expenses or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.
Taxation Ruling TR 95/35 - Income tax: capital gains: treatment of compensation receipts indicates that settlement of a personal injuries claim represents the disposal of an asset, as you have disposed of the right to seek compensation for the losses arising from the injury suffered. 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 you of the right to seek compensation.
As the amount you have received is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a CGT event (CGT event C2) happening to your right to seek compensation.
However paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain where the amount relates to compensation or damages received for any wrong or injury you suffer in your occupation or any wrong, injury or illness you or your relative suffers personally.
Therefore the lump sum amount for personal injury will be exempt from CGT.
Conclusion
As the amount from the personal injury compensation is not assessable as either ordinary income or as a capital gain it will not be assessable income. Therefore the lump sum amount for the personal injury claim amount will not be required to be included in your income tax return.