Private ruling: Taxation of your Compensation Payment
Date of advice: 10 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you assessable on the compensation payment you received? | A1: No. | Q2: Will any capital gains arising from the compensation payment be disregarded? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-30 | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources 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. In your case, the payment you have received was not from rendering personal services, income from property or income from carrying on a business. Although the payment may have been expected and relied upon, it was not earned and was received in a lump sum. Therefore, the payment you received is not assessable as ordinary income. | Detailed Reasoning - Capital gains tax (CGT): Amounts received in respect of personal injury which are not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the CGT provisions of the ITAA 1997. Paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Therefore, any capital gain that may arise from the receipt of the lump sum payment for injury will be disregarded.

Relevant facts: You had sustained a workplace injury and were unable to work for a period of time, and during that time you received workers' compensation payments. | Your workers' compensation claim was closed and the insurer arranged for you to be medically examined to assess the degree of permanent impairment you had sustained. | You were assessed that you have a work-related impairment and you were offered a lump sum payment. You accepted the offer and received the payment.