ATO ID 2010/213: Assessability of pre-judgment interest
Date of decision: 8 November 2010
Year of income: Year ended 30 June 2010
Business line: Small Business/Individual Taxpayers

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
Summary: 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: 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.

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
Related ATO interpretative decisions: ATO ID 2003/404
Subject references: Compensation income Damages income Interest income Personal injury awards Workers compensation income