Edited version of your written advice

Authorisation Number: 1051413510430

Date of advice: 28 August 2018

Ruling

Subject: Compensation payment

Question

Are the compensation payments for interests on non-economic loss and Incapacity/loss of income assessable within the terms of section 6-5 of the ITAA 1997?

Answer

Yes

Question

Are the compensation payments for whole person permanent impairment/non-economic loss, household services, attendant care services, modifications to home and car, future medical expenses capital in nature and exempt under paragraph 118-37(1)(a) of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You have been assessed to receive an amount of compensation payable to you under an overseas travel claim

You have been assessed at the highest level in order to offer you the maximum amount possible

You received a Lump Sum Payment in settlement for a travel insurance injury claim

You have incurred some additional expenses that have not been repaid and are included in the assessment

A breakdown of the components is provided below:

● Whole person permanent impairment/Non-economic loss

● Interest on non-economic loss

● Incapacity/loss of income

● Household services

● Attendant care services

● Modifications to home and car

● Future medical expenses

● Lump Sum payment

● Payments already made for medical expenses, modifications and other self-incurred expenses

You were engaged under an Australian government scheme overseas.

While performing your duties, you suffered a workplace accident.

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 118-37

Reasons for decision

Summary

The compensation payments for interests on non-economic loss and Incapacity/loss of income made under the SRC Act will need to be included as assessable income.

These compensation payments are characterised as income according to ordinary concepts and is therefore included in your assessable income within the terms of section 6-5 of the ITAA 1997.

The following compensation payments made under the SRC Act do not need to be included as assessable income:

● Whole person permanent impairment/non-economic loss

● Household services

● Attendant care services

● Modifications to home and car

● Future medical expenses

These payments are regarded as being capital in nature and paragraph 118-37(1)(a) of the ITAA 1997 will apply to the compensation amounts as being directly related to a personal injury, so that any capital gain or capital loss will be disregarded.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). However, an amount of ordinary or statutory income will not be assessable income if the amount is made exempt or is otherwise excluded from assessable income.

Subsection 6-5(2) of the ITAA 1997 states that the assessable income of an Australian resident taxpayer includes 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.

Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? states that any part of a lump sum compensation amount will only be assessable as ordinary income:

(a) if the payment is compensation for loss of income only, or

(b) to the extent a portion of the lump sum is identifiable and quantifiable as income. This is possible where the parties either expressly or impliedly agree that a certain portion of the payment related to a loss of an income nature.

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.

As the compensation payments are for the replacement of income, they are classified as income, even though they are paid in a lump sum. The interest component of the payment is also ordinary income under section 6-5 of the ITAA 1997.

Capital in nature

A compensation amount generally bears the character of what it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

A payment that is capital in nature is not assessable as ordinary income under section 6-5 of the ITAA 1997.

In your case, the lump sum payment is made in respect to medical expenses, modification to home and car, attendant care services, household services, whole person permanent impairment/non-economic loss which affects your future income earning capacity.

The lump sum compensation payment you receive is in settlement of your personal injury and loss of earning capacity.

Section 6-10 of the ITAA 1997 includes amounts of statutory income in assessable income, that is, amounts that are specifically listed as assessable income in Division 10 of the ITAA 1997. The two provisions applicable in your case are section 15-30 of the ITAA 1997 and Part 3-1 of the ITAA 1997.

Section 15-30 of the ITAA 1997 operates to include in your assessable income an amount received as insurance or indemnity for loss of an amount if the loss amount would have been included in assessable income and the amount received is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Part of your compensation amount does not meet this description, as part of the benefits are in respect to your medical expenses, modification to home and car, attendant care services, household services, whole person permanent impairment/non-economic loss and these are regarded as being capital in nature.

Capital gains tax

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.

Part 3-1 of the ITAA 1997 contains the general capital gains tax (CGT) provisions. Receipt of a lump sum payment may give rise to a capital gain. However, paragraph 118-37(1)(a) of the ITAA 1997 disregards payments or receipts for the purposes of the CGT provisions where the capital amount relates to compensation or damages you received for any wrong, injury or illness suffered in your occupation.

The compensation amounts in respect to your medical expenses, modification to home and car, attendant care services, household services, whole person permanent impairment/non-economic loss meets this description. Paragraph 118-37(1)(a) of the ITAA 1997 will apply to these compensation amounts so that any capital gain or capital loss will be disregarded.