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Edited version of private advice
Authorisation Number: 1051574669963
Date of advice: 6 September 2019
Ruling
Subject: Lump sum payment for general damages
Question
Will the $X you received for general damages be included in your assessable income as ordinary income, an eligible termination payment (ETP) or a capital gain?
Answer
No.
The payment does not have the characteristics of ordinary income and it does not satisfy all of the conditions set out in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) to be an ETP.
As the settlement is a payment for general damages as a result of an incident suffered by you, the amount is considered to be a capital payment. The receipt of a lump sum payment may give rise to a capital gain (statutory income) under Capital Gains Tax (CGT) event C2 which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation.
As the amount from the general damages is not assessable as ordinary income, an eligible termination payment or as a capital gain it is not included in your assessable income.
This ruling applies for the following period:
Year ended 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
You commenced employment in September 20xx.
You sustained a work related injury in April 20xx.
You ceased employment in June 20xx.
Your employer is self- insured.
You lodged a claim for workers compensation pursuant to the Return to Work Act 2014 which was rejected by the relevant Tribunal (the Tribunal) in July 20xx (the Determination).
You lodged an application for review with the Tribunal in which you disputed the Determination.
The Tribunal orders confirmed the Determination in July 20xx.
You signed a Deed of Settlement and Release under which you received a lump sum amount (the settlement sum) paid as general damages to resolve the dispute that you had with your employer.
The Deed of Settlement and Release dated xx May 20xx makes no reference to cessation of employment upon execution of the Deed.
There is no clause to support that but for the termination of employment, the settlement sum would not be paid to you.
As per section 2.1.1 of the Deed of Settlement:
"the Sum will be paid as general damages on a without prejudice basis and with denial of liability in respect of all matters between the parties".
The payment of the settlement sum was not 'in consequence of' the termination of your employment with the employer.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5,
Income Tax Assessment Act 1997 Section 82-130,
Income Tax Assessment Act 1997 Subsection 82-130(1),
Income Tax Assessment Act 1997 Paragraph 82-130(1)(a),
Income Tax Assessment Act 1997 Paragraph 82-130(1)(b),
Income Tax Assessment Act 1997 Paragraph 82-130(1)(c),
Income Tax Assessment Act 1997 Section 82-135, and
Income Tax Assessment Act 1997 Subparagraph 118-37(1)(a)(i).