Private ruling: Taxation of your compensation payments
Date of advice: 9 June 2016
Published: July 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Does the compensation you will receive for the wrongful death of your spouse form part of your assessable income? | A1: No | Q2: Will any capital gains taxes (CGT) arise from the lump sum compensation payment be disregarded? | A2: Yes

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on your application for private ruling. You are an Australian resident for tax purposes. You will receive a compensation payment as a result of the wrongful death of your spouse during an accident. The payment will be for damages on account of personal injury. No part of the payment represented loss of income.

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 Section 118-37

Reasons for decision: Detailed Reasoning - Issue 1: Assessability of your lump sum compensation payment | Detailed Reasoning - Question 1: Does the compensation you received for the wrongful death of your spouse form part of your assessable income? | Summary: The lump sum compensation payment you will receive will not be subject to income tax. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the ITAA 1997 states that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Ordinary income is income according to ordinary concepts which is not specifically defined in the legislation. However, characteristics of ordinary 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. Payment for personal services, whether received in the capacity of an employee or otherwise in connection with employment or other personal services income is income according to ordinary concepts. Similarly, any payment (for example compensation) to replace income is also considered to be income for ordinary concepts. You will receive a compensation payment for the wrongful death of your spouse. The payment was for personal injury and not for loss of income. The compensation payment to be receive therefore will not be income according to ordinary concepts and not assessable under section 6-5 of the ITAA 1997. Where an amount of income is not ordinary income it may be included in a taxpayer's assessable income under section 6-10 of the ITAA 1997. This income is called statutory income and is made assessable by a specific provision of the taxation legislation. Section 118-37 of the ITAA 1997 specifically excludes compensation or damages received for any wrong, injury or illness your relative suffers personally. The term 'relative' is defined to include a spouse. Thus, the compensation payment will receive is not statutory income. The compensation payment you will receive for the wrongful death of your spouse does not form part of your assessable income and is not required to be included on your relevant tax returns. | Detailed Reasoning - Question 2: Will any capital gains taxes (CGT) arise from the lump sum compensation payment be disregarded? | Summary: Any capital gain that may arise from the receipt of the lump sum payment for injury will be disregarded. | Detailed Reasoning - Detailed reasoning: 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. Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (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. However, section 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'. Therefore, any capital gain that may arise from the receipt of the lump sum payment for injury will be disregarded.