Edited version of private advice

Authorisation Number: 1051738858066

Date of advice: 13 August 2020

Ruling

Subject: Lump sum payment

Question 1

Is the lump sum payment you received assessable income as per section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No. Pursuant to the Income Tax Assessment Act, personal injury lump sum compensation payments are not considered to be assessable income. It is accepted that the lump sum payment you have receivedis not a payment for assessable income as it was not earned, expected, relied upon, and did not have an element of periodicity, recurrence or regularity.

Question 2

Is the lump sum payment you received disregarded from capital gains tax (CGT)under subparagraph 118-37(1)(a)(ii) of the ITAA 1997?

Answer 2

Yes. The Commissioner accepts that the lump sum payment you have received is not a capital amount and therefore is disregarded. You do not pay any Capital Gains Tax on a lump sum personal injury compensation payment. If you earn interest on your personal injury settlement money, the interest earned may be taxable and may need to be recorded in your tax return. Similarly, if you use your settlement money to purchase an asset that is subject to Capital Gains Tax, you may be required to pay Capital Gains Tax when you sell that asset.

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were employed in the medical field.

You sustained an injury.

You made a claim for income protection payments from your insurance company (the insurer).

This injury rendered you disabled within the meaning of the policy.

The insurer accepted the claim and commenced making monthly payments.

You have declared your payments under the income protection policy as income on your income tax returns with the Australian Taxation Office (ATO).

The insurer ceased making monthly income protection payments under the policy after your 65th birthday.

The insurance policy stated that payments would stop once the insured person turned 65 unless the disability was caused by an injury.

Following the termination of the payments you challenged policy definitions of injury and sickness.

The dispute was ongoing until a settlement was reached.

A Deed of Release was executed including a settlement sum.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 118-37