Edited version of private advice

Authorisation Number: 1052201208486

Date of advice: 7 December 2023

Ruling

Subject: Lump sum compensation

Question

Is the lump sum compensation/settlement payment taxable income?

Answer

No. In your case the lump sum payment made by your employer is for compensation due to personal wrong or injury at work. The once-off lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the Income Tax assessment Act 1997 (ITAA 1997). The payment bears none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity. Therefore, the lump sum payment is capital in nature and will not be assessable as ordinary income.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income may be assessable under another provision are called statutory income. Receipt of a lump sum payment may give rise to a capital gain (statutory income). However, a capital gain or loss made upon the ending of a capital gains tax (CGT) asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation.

In your case, the payment was made to you for compensation for a 'wrong, injury or illness suffered personally at work.

Therefore, any capital gain or capital loss arising from a CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payment will not be assessable as statutory income.

As the lump sum payment is not assessable as either ordinary or statutory income, you are not required to include the amount in your assessable income.

This ruling applies for the following period:

Year ended 20YY

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You suffered a personal wrong or injury in your occupation at your workplace.

You lodged a complaint with the Health Complaints Commissioner (HCC) resulting in the HCC facilitating a conciliation meeting with yourself and your employer.

A financial settlement was negotiated during the conciliation meeting.

You signed a contract (deed of release) on XXX with your employer to resolve the complaint which was in relation to compensation or damages you received for the wrong or injury you suffered in your occupation at work.

Your employer made a once-off lump sum compensation payment on XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 6-10

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