Private ruling: Compensation payment-injury
Published: March 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the lump sum compensation payment that you received for damages arising from injuries sustained in an accident be included in your assessable income? | A1: No. | Q2: Will your lump sum compensation payment be subject to capital gains? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Section 15-30. | Income Tax Assessment Act 1997 Section 102-5. | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). 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. A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. Taxation Ruling IT 2193 deals with the issue of compensation for the loss of earning capacity arising from a motor vehicle accident. IT 2193 makes it clear that compensation for loss of earning capacity will not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the taxpayer would have earned. In your case you received a compensation payment that is not income from rendering personal services, income from property or income from carrying on a business. The payment is a one-off payment and does not have an element of recurrence or regularity. Although the payment can be said to be expected and perhaps relied upon, this expectation arises from the pain and suffering resulting from the injury, rather than from a relationship to personal services performed. Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. No component of your lump sum payment was to compensate for loss of income. Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital gains tax arising from the compensation payment: Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 15-30 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally. Accordingly, the compensation payment you received is not assessable under either section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997.

Relevant facts: You were employed by an entity. | You engaged a legal representative to lodge a claim against an insurer for pain and suffering as a result of your injuries. | You were awarded a compensation payment for pain and suffering under legislative statue. | No tax was deducted from the compensation payment. | The payment is a one off payment in full and final settlement of your claim. | You have given up your rights to any future claims in respect of monies paid to you by the insurer arising out of your injuries. | The lump sum payment did not contain monetary components for loss of earning or medical expenses.