Edited version of private advice

Authorisation Number: 1052154542042

Date of advice: 11 August 2023

Ruling

Subject: Income - lump sum - compensation

Question

Is the payment for general damages made to you by the employer assessable income?

Answer

No.

We have reviewed your circumstances and consider the payment received by way of general damages is not assessable as either ordinary or statutory income.

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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.

Ordinary income has been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

The lump sum payment you received is not income from rendering personal services, income from property or income from carrying on a business. It is a one-off payment and thus does not have an element of recurrence or regularity. The amount is not assessable under section 6-5 of the ITAA 1997.

The amount received was also considered under section 6-10 of the ITAA 1997 under the concept of statutory income (such as capital gains). Amounts received as a lump sum are generally capital in nature and are potentially taxable under the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997.

Where compensation is paid for the loss of a capital asset or capital amount then it will be regarded as a capital receipt.

The right to seek compensation is the right of action arising at law or in equity on the occurrence of any breach of contract, personal injury or other compensable damage or injury. The right to seek compensation is an asset for CGT purposes.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens on the ending of the right to seek compensation, that is, the right to take legal action.

The payment you received is a payment for ending of this right. Therefore, CGT event C2 happened in the signing of the Deed and receiving of the payment. The payment is therefore considered a capital receipt, with any resulting capital gain made from the event ordinarily assessed under the CGT provisions.

However, subparagraph 118-37(1)(a)(i) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation for damages a person receives for any personal wrong or injury suffered in their occupation.

We consider the general damages payment relates to a personal wrong or injury suffered by you in your occupation and any capital gain made from the receipt of monies is disregarded under section 118-37 of the ITAA 1997.

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

Further information can be found in Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were employed from XX XX with the employer as a casual labour hire in Occupation A.

The employer supplied you to work for another entity to work as a casual in Occupation A.

You ceased work on XX XX 20XX.

Your employment ceased after you discontinued the work.

You lodged a complaint with the XX XX alleging you suffered a personal wrong or injury while working with the other entity. The complaint was amended to being against the employer as they were your employer and the complaint was referred to the State Administrative Tribunal.

The employer denied liability for the complaint.

You and the employer settled the complaint and all claims through a Deed of Release (Deed) in 20XX.

Under clause 2.1 of the Deed, the employer will pay you the amount of $XX by way of general damages for the wrong or personal injury.

You were awarded general damages for the amount of $XX.

The payment was made on XX XX 20XX.

You have received an undissected lump sum payment. There was no breakdown of the payment provided.

Clause 2.3 of the Deed indicates the payment includes the full amounts owed to you, whether for salary, wages, other remuneration, leave entitlements, payment in lieu of notice, severance pay, compensation, damages or anything else related to the complaint, your employment, the work, any demand, and the termination as satisfaction of your rights.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 82-137

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5