Edited version of private advice

Authorisation Number: 1052279942782

Date of advice: 26 July 2024

Ruling

Subject: Compensation

Question 1

Is the compensation payment of XXX,000 from the Support Scheme assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

The interim compensation payment

The interim compensation payment was not earned by you as it did not relate to services performed. The payment was not a revenue receipt directly related to your employment duties. The payments were not considered to be a payment for lost income. The payments were also one-off payments and thus do not have an element of recurrence or regularity. Although the payments can be said to be expected, and perhaps relied upon, this expectation arises from the chronic medical condition you suffer as a result of a medical procedure. Considering the full circumstances, the interim compensation payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Question 2

Is the capital gain or loss from the above payments from the Support Scheme disregarded under the capital gains tax (CGT) provisions?

Answer

Yes.

The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a 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.

Therefore, any capital gain or capital loss arising from the 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.

This ruling applies for the following period:

Period ended 30 June 20XX

The scheme commenced on:

XX X XX

Relevant facts and circumstances

You are an Australian resident.

You formerly resided in foreign Country A.

You received medical treatment from a Country A hospital. This treatment received has caused you serious health issues in the years since the medical treatment was received.

As a result, the foreign Country A government is now giving redress compensation payments to victims of these medical treatments received via the Support Scheme. These payments are treated entirely as tax free in foreign Country A, for Country A recipient taxpayers.

You have had a scheme application approved by the foreign Country A government.

The payments under the support scheme are being made because:

•                     the chronic condition is expected to cause you to have resulting substantial and long-term difficulties when carrying out routine daily activities, and

•                     individuals living with those conditions face extra costs.

Your application did not (and was not required to, nor requested) disclose any information in respect of your income capacity.

On XX X 20XX, it was confirmed that an interim compensation of $XXX,000 will be paid to you as a registered beneficiary of the scheme. This is a one-off government interim payment.

The payment was made on XX X 20XX into your nominated bank account.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 6-10(4)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 paragraph 118-37(1)(b)