Edited version of private advice

Authorisation Number: 1051727799070

Date of advice: 31 July 2020

Ruling

Subject: Compensation payment for personal injury

Question 1

Is the client considered exempt from Capital Gains Tax (CGT) under the Income Tax Assessment Act 1997 paragraph 118-37(1)(a)?

Answer

Yes

Question 2

Will the amount received for general damages, as compensation for the pain and suffering of the Complainant arising from the Personal Injury be treated as exempt income instead of assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

An agreement was signed in May 20XX by the following:

·         Yourself (The Complainant)

·         The company, (in liquidation)(First Respondent);

·         First individual(Second Respondent);

·         Second individual (Third Respondent).

You were employed by The company('First Respondent') from XX XX 20XX to X XX 20XX ('Employment').

In XX 20XX, you claimed workers compensation and ceased attending work.

On X XX 20XX, you lodged a Complaint with The Commission commencing complaint against the First Respondent and the Second Respondent ('Complaint').

On XX XX 20XX, the First Respondent went into voluntary administration.

Your Employment ceased on X XX 20XX('Termination').

You have been diagnosed as suffering from a Personal Injury and has alleged that the cause of her condition were incidents that occurred during the Employment.

You lodged a further complaint of victimisation with The Commission on X XX 20XX (the victimisation complaint) against the First, Second and Third Respondents.

Without admission of liability, the parties have agreed to resolve all matters relating to the employment, the complaint, the termination, the personal injury and the victimisation complaint and the subject matter of the proceedings on the following terms.

Without any admission of liability, within seven days of the execution of this Agreement by all of the Parties, an ex gratia payment will be made by, or on behalf of, the First, Second and Third Respondents in the amount of $XXXX ('Payment')

The client's ex gratia payment mentioned in the agreement is being offered to release and discharge the respondents from all claims they may have had and to stop her making or instituting or continuing any claims she had in relation to the complaint lodged for stress, pain and suffering.

Each party will bear their own legal costs of the complaint and no payment will be made in respect of legal costs.

Within two business days of the payment being made, you will write to the AHRC formally withdrawing the complaint and the victimisation complaint.

Furthermore, your agreement states that subject to the First, Second and Third Respondents complying with all of their obligations under Clause 1 of this Agreement, the Complainant agrees:

a)    To release and discharge the First, Second and Third Respondents from all Claims that she has or may have or, but for this Agreement, may have had, against the First, Second and Third Respondents; and

b)    Not to make, institute or continue any claims you have or may have or, but for this Agreement, may have had, against the First, Second or Third Respondents;

in any way connected with the employment, termination, or the subject matter of the complaint or the victimisation complaint, whether arising at common law or in equity or under statute or otherwise (save and except for any claims under the Workers Compensation Act.

The lump sum is in no way compensation for wages because the taxpayer was paid under workers compensation for wages from XX 20XX to XX 20XX when employment ceased.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

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

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

Income Tax Assessment Act 1997 subsection 1-3(2)

Income Tax Assessment Act 1936 subsection 160ZB(1)

Reasons for decision

Answer 1

Compensation payments and the capital gains tax (CGT) provisions

Under section 6-10 of the Income Tax Assessment Act 1997(ITAA 1997) some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are 'statutory income'. Statutory income may arise from CGT events as consequence of an eligible claimant being entitled to receive compensation and the loss and destruction of a CGT asset.

Taxation Ruling TR 95/35 provides the Commissioner's view as to the CGT consequences of receiving a compensation payment.

Subsection 160ZB(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which was re-written as paragraph 118-37(1)(a) of the ITAA 1997 sheds light on what is meant by a wrong you suffer personally.

Subsection 160ZB(1) of the ITAA 1936 stated:

A capital gain shall not be taken to have accrued to a taxpayer by reason of the taxpayer having obtained a sum by way of compensation or damages for any wrong or injury suffered by the taxpayer to his or her person or in his or her profession or vocation and no such wrong or injury, or proceeding instituted or other act done or transaction entered into by the taxpayer in respect of such a wrong or injury, shall be taken to have resulted in the taxpayer having incurred a capital loss.

(emphasis added)

Subsection 1-3(2) of the ITAA 1997 states that where the 1936 Act expressed an idea in a particular form of words and the 1997 Act appears to have expressed the same idea in a different form of words in order to use a clearer or simpler style, the ideas are not be taken to be different just because different forms of words were used.

There is nothing in an Explanatory Memorandum or any other extrinsic material in relation to the remaking of subsection 160ZB(1) of the ITAA 1936 into paragraph 118-37(1)(a) of the ITAA 1997 that indicates that the meaning or effect of the new provision was to be any different to the old provision.

In this instance the compensation relates to a personal wrong, injury or illness which you have suffered personally and CGT will be therefore be disregarded under paragraph 118-37(1)(b) of the ITAA 1997.

Answer 2

Compensation payment as ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Compensation paid due to the surrendered right to seek compensation relating to a personal wrong, injury or illness which you have suffered personally is an isolated transaction. Whether a profit from an isolated transaction is ordinary assessable income according to ordinary concepts depends on the circumstances of the case. Profit from an isolated transaction is generally ordinary income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and

(b) the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction (paragraph 6 of Taxation Ruling TR 92/3).

Accordingly, the compensation payment paid, does not give rise to income according to ordinary concepts or to a profit arising from a profit-making undertaking or plan pursuant to section 6-5 of the ITAA 1997.

In your case, the lump sum payments have been received as compensation for a 'wrong or injury you have suffered in your occupation". Therefore, any capital gain or capital loss arising from the CGT event as previously outlined above will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payments will not be assessable as statutory income. Therefore, as the lump sum payments are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.