Private ruling: Assessability of lump sum compensation payment
Published: March 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the lump sum compensation payment you received under a workers compensation claim assessable income? | A1: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You sustained a work place injury that prevented you from working. You have been getting weekly payments for a number of years to replace your salary and wages. The compensation payments replace income you were unable to earn during this period. You were awarded a lump sum payment of $X based on an increased weekly payment of $Y.

Relevant legislative provisions: Income tax Assessment Act 1997 Section 6-5 | Income tax Assessment Act 1997 Subsection 6-5(2) | Income tax Assessment Act 1997 Subsection 6-5(4)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (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. Payments of salary and wages are examples of ordinary income. Receipts that are not salary or wages, but are paid as a substitute for salary or wages that would normally have been earned, expected and relied upon by a taxpayer, are also assessable as ordinary income. The general principle is that such payments take on the character of the salary or wages they replace. That is, if the substituted amount was an amount of ordinary income, the amount paid to compensate for the loss of that amount will also be ordinary income. In your case the lump sum payment was awarded to you to replace income you were unable to earn whilst incapacitated. As the payment is compensating you for income that would have been assessable income, this payment is therefore treated as also being assessable income and must be included in your income tax return in the year that you received the payment.