Private ruling: Compensation - personal injury
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the lump sum payment received as compensation for your relative's illness included as assessable income? 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 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. The lump sum you received was not earned as it does not relate to services performed. The payment is also a one-off payment and thus it 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 as a result of your illness, rather than from a relationship to personal services performed. Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. 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 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains. Amounts received in respect of personal injury 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 (CGT) provisions of the ITAA 1997. However, 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 or your relative suffer personally'. Accordingly, the lump sum payment received by you for personal injury as a dependant beneficiary of your late relative's estate is not assessable under either section 6-5 or section 102-5 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You received a personal injury compensation payment as a dependant beneficiary of your late relative's estate. | The compensation was paid for: | · Past care and assistance provided by you | · Loss of expectation of life | · Out of pocket expenses including private health, medical, hospital and pharmaceutical. | There was no claim for future medical expenses. | Economic loss was not claimed as your relative was retired.