ATO Interpretative Decision
ATO ID 2010/213
Income Tax
Assessability of pre-judgment interestFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is pre-judgment interest received as part of a lump sum compensation payment for personal injury assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Pre-judgment interest received as part of a lump sum compensation payment for personal injury is not assessable under section 6-5 of the ITAA 1997 as the amount is a capital receipt.
Facts
The taxpayer sustained personal injuries in a work related accident.
They took legal action seeking compensation for their injuries.
As a result, they were awarded a lump sum damages payment.
The payment included an amount of pre-judgment interest.
Reasons for Decision
Section 6-5 of the ITAA 1997 includes ordinary income in a taxpayer's assessable income.
Interest income is normally regarded as ordinary income for the purposes of section 6-5 of the ITAA 1997.
Lump sum damages awarded at common law for a personal injury claim often include amounts of interest in the form of pre-judgment and/or post-judgment interest.
Pre-judgment interest is calculated from the date the cause of action (for example the accident) occurred until the date the judgment is made.
In Whitaker v. Federal Commissioner of Taxation (1998) 82 FCR 261; 38 ATR 219; 98 ATC 4285 (Whitaker), the full Federal Court considered the assessability of interest on damages awarded for personal injury.
The court decided that pre-judgment interest did not have the character of income but was a receipt of a capital nature. It noted that:
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- the primary purpose of pre-judgment interest was to compensate a successful plaintiff for being deprived of the use of the money. It was not compensation for a foregone investment opportunity and did not replace any actual or notional lost income; and
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- the pre-judgment interest was one of the components which made up the global sum constituting the amount of the award for which judgment was entered.
In view of the decision in Whitaker it is accepted that the amount of pre-judgment interest received as a result of the award of damages for personal injury is a capital receipt and is not assessable under section 6-5 of the ITAA 1997.
Date of decision: 8 November 2010Year of income: Year ended 30 June 2010
Legislative References:
Income Tax Assessment Act 1997
section 6-5
Case References:
Whitaker v Federal Commissioner of Taxation
(1998) 82 FCR 261
98 ATC 4285
38 ATR 219
ATO ID 2003/404
Keywords
Compensation income
Damages income
Interest income
Personal injury awards
Workers compensation income
ISSN: 1445-2782