| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051514360183
Date of advice: 17 May 2019
Ruling
Subject: Compensation payment
Question
Is the compensation for personal injury received under the Motor Accidents Compensation Act (NSW) 1999 (MACA) following a motor vehicle accident, assessable income?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2019
The scheme commenced on
1 July 2018
Relevant facts
You were involved in a motor vehicle accident.
The accident happened on the way home from work. You missed one day’s work as a result of the accident.
You lodged a claim under the MACA for injuries sustained as a result of the motor vehicle accident.
Under the Deed of Release and Indemnity, the insurer was to pay you an amount of $XX,XXX in full and final settlement of all claims under MACA.
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 Section 10-5
Income Tax Assessment Act 1997 Paragraph 118-37(1)(a)
Reasons for decision
Ordinary income
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 they 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 form 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).
On the other hand, 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. Damages awarded for injury or impairment of earning capacity is not ordinary income (Groves v. United Pacific Transport Pty Ltd [1965] Qd R 62).
Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? explains the circumstances in which a lump sum compensation/settlement payment is assessable, and states that such a payment is assessable income:
● if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined), or
● to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.
You received your compensation payment as a result of lodging a motor vehicle personal injury claim, in respect of injuries you sustained.
This payment was not earned by you as it does not relate to services performed or income from carrying on a business. 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 personal injury resulting from the accident, rather than from a relationship to personal services performed.
The payment made under the MACA was not paid to compensate you for loss of income. Therefore, your compensation is not assessable as ordinary income under section 6-5 of the ITAA 1997.
Your compensation is capital in nature, therefore, it is also necessary to consider the provisions of the income tax law which deal with capital receipts.
Statutory income
Statutory income is not ordinary income, but is included in assessable income by specific provisions of the income tax law (section 6-10 of the ITAA 1997).
Capital gains are included in assessable income by virtue of the capital gains tax (CGT) provisions.
However, subparagraph 118-37(1)(a)(ii) of the ITAA 1997 disregards any capital gain or capital loss you make from a CGT event relating directly to compensation or damages you receive for any wrong, injury or illness you suffer personally.
Therefore, the compensation you received for personal injury from a motor vehicle accident is not assessable under the CGT provisions.
The compensation you received is not ordinary income and is not statutory income. Consequently, it is not assessable income (subsection 6-15(1) of the ITAA 1997).