Private ruling: Assessable income
Date of advice: 20 May 2026
Published: 3 August 2026
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20YY | Year ending 30 June 20YY | Year ending 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are the compensation payments you receive from Country Z included in your assessable income in Australia? | A1: No.

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You are in receipt of compensation payments. You commenced receiving the payments a number of years ago. The payment is from a Country Z Authority and in accordance with their legislation. You state that the pension is not a form of compensation for persecution. You state that the compensation amount is calculated the same for any other persons in the same situation and is not dependent on your income-earning activities in any way. You completed a standard application form, which is available to all applicable persons. The compensation payment is granted for life. The compensation payment is not means tested.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5

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. In determining liability to Australian tax of foreign sourced income received by a resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act). The Agreements Act contained the tax treaty between Australia and Country Z. The Country Z Agreement operates to avoid the double taxation of income received by Australian and Country Z residents. The Country Z Agreement provides that pensions and annuities paid to a resident of Australia are taxable only in Australia. As Australia has the sole taxing right on the pension under the Country Z Agreement, the pension falls for consideration under the Australian taxation system. 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. An amount paid to compensate for a loss generally acquires the character of that for which it is substituted. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts. The compensation payment is expected (and perhaps relied upon) as your entitlement to the payment arises under the Country Z legislation. It also has an element of recurrence and regularity as it is paid periodically. However, the amount is paid to you to compensate you for any pain and suffering, these payments are not earned as they are not calculated with respect to any income earning activity. Therefore, the compensation payment does not substitute income and is not ordinary income. Accordingly, the monthly amounts are not assessable under subsection 6-5(2) of the ITAA 1997. Statutory Income Section 6-10 of the ITAA 1997 provides that your assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains. Section 102-5 of the ITAA 1997 provides that any net capital gain (if any) for the income year is included in your assessable income. Amounts of compensation received which are not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. As the amount you receive is not in respect of any underlying asset, the whole of the amount is treated as capital proceeds from a capital gains tax (CGT) event happening to your right to seek compensation. However, section 118-37 of the ITAA 1997 provides a statutory exemption for certain types of capital receipts which might otherwise be included in the assessable income of the recipient. Paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. In your case, the compensation payments you receive are paid to you for any 'wrong, injury or illness you suffer personally'. Therefore, any capital gain made from a CGT event arising from these payments is disregarded under paragraph 118-37(1)(b) of the ITAA 1997 and are not included as assessable income under section 6-10 of the ITAA 1997. Accordingly, the compensation payments you receive are not assessable income under either subsection 6-5(2) or section 6-10 of the ITAA 1997.