Edited version of private advice

Authorisation Number: 1051800181107

Date of advice: 2 February 2021

Ruling

Subject: Compensation payments

Question

Do the payments you receive on behalf of your relative, form part of your assessable income?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Your relative sustained injures in a motor vehicle accident.

The court awarded general damages.

You received payments on behalf of your relative, for their benefit.

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 102-5

Income Tax Assessment Act 1997 Section 118-37

Reasons for decision

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary and statutory income derived directly and indirectly from all sources 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

•         have an element of periodicity, recurrence or regularity.

In your case, the payments you have received and will continue to receive over a period of time are not from rendering personal services, income from property or income from carrying on a business. The payments you receive are for the benefit of your relative as they have been awarded by the courts as a result of injuries/damages sustained in a motor vehicle accident. These payments are considered to be a capital payment.

The payments you are being paid on behalf of your relative are not assessable to you under section 6-5 of the ITAA 1997 as ordinary income.

Capital gains tax (CGT)

Statutory income (section 6-10 of the ITAA 1997) is amounts that are not ordinary income but are included in assessable income by another provision. Section 102-5 of the ITAA 1997 provides that assessable income includes net capital gains for the income year.

However, section 118-37 of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any wrong, injury or illness you or your relative suffers personally.

The right to seek compensation is the right of action, arising at law or in equity, which vests in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury. The right to seek compensation is a CGT asset as defined in section 108-5 of the ITAA 1997. The right to seek compensation is taken to be acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation (an intangible asset) is disposed of when it is satisfied, surrendered, released or discharged. CGT event C2 happens when your right to seek compensation is satisfied, surrendered, released or discharged (section 104-25 of the ITAA 1997).

You receive payments under a court order, on behalf of your relative, for damages resulting from a motor vehicle accident. The payments you receive relate to CGT event C2 happening and are considered capital receipts, with any resulting capital gain made from the event ordinarily assessed under the capital gains tax provisions. However, as the payments relate to compensation received for personal injury suffered by your relative, any capital gain made from the receipt of monies will be disregarded.

As the compensation amount you receive on behalf of your relative is not assessable as either ordinary income or statutory income, no part of it is included in your assessable income.