Edited version of private advice

Authorisation Number: 1052154718975

Date of advice: 14 August 2023

Ruling

Subject: Lump sum compensation payment

Question

Is the lump sum compensation payment you received assessable income?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You sustained injuries in the course of your employment.

You submitted a claim for compensation for the injury (the claim).

Your employer accepted liability of your claim for your injury sustained.

The liability was accepted in relation to reasonable medical expenses and lost time wages in accordance with the Act.

You rejected the offer and instructed your lawyer to put a final offer to your employer.

Your employer agreed to resolve your entitlement to compensation in respect of the injuries by entering into a Deed of Agreement.

Under the Deed of Agreement, you agreed to accept a lump sum payment (agreed amount).

The agreed payment includes costs of obtaining independent legal advice in relation to the settlement in this Deed of Agreement, and any Statutory Charges relevant to the injury and the claim, including but not limited to repayment to Centrelink and Medicare Australia.

Upon payment of the agreed payment, you will cease any further provision and/or payment of compensation to the Worker pursuant to the Act and you not entitled to any further or future payments under the Act in respect of the injury.

You were advised by your lawyer that settlement of your claim was subject to the provisions of the Health and Other Services (Compensation) Act 1995 and it was theemployer's intention to take the advance payment advance payment option.

The amount of the advance payment sent to Medicare.

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 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-37

Reasons for decision

Ordinary income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, 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, and

•                     have an element of periodicity, recurrence or regularity.

Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.

In your case you were making a claim for compensation for the injury. You agreed to accept a lump sum payment to give up your claim for compensation with your employer.

The lump sum settlement received does not relate to personal services, property, or the carrying on of a business. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from the performance of personal services. In your circumstances, the lump sum payment is not for loss of income and not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Statutory income

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by specific provisions of the income tax law, are called statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997.

Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a capital gains tax (CGT) asset. A taxpayer's right to seek compensation is therefore classified as an intangible CGT asset.

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 lump sum amount you will receive will be capital proceeds for this CGT event and a capital gain will usually arise.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts discusses the CGT implications for compensation receipts. Why the payment was made is an important factor in determining whether an asset has been disposed of for CGT purposes.

TR 95/35 discusses the various scenarios, including:

•                     disposal of the underlying asset,

•                     compensation for permanent damage to, or permanent reduction in value of, the underlying asset, and

•                     disposal of the right to seek compensation.

Paragraph 118-37(1)(a) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness.

In your case, the payment is compensation received for an injury you suffered in your occupation, as such the payment is exempt from CGT under paragraph 118-37(1)(a) of the ITAA 1997.