Private ruling: Compensation payment
Published: May 2012
Ruling period: Year ending 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Questions and answers | Are you required to include the compensation lump sum payment in your income tax return? | No. | Are you required to include the interest you earned relating to the compensation payment in your income tax return? | Yes.

Relevant facts and circumstances: You received a lump sum payment following the death of your spouse. You have earned interest in relation to this compensation payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 paragraph 118-37(1)(b)

Reasons for decision: Detailed Reasoning - Compensation lump sum: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary income. The characteristics of income include receipts that: · are earned · are expected · are relied upon · have an element of periodicity, recurrence or regularity In your case, you received a lump sum compensation following the death of your spouse. This payment was not earned, it was not from rendering personal services, income from property or income from carrying on a business. Therefore, the lump sum compensation payment you received is not ordinary income and is not assessable under section 6-5 of the ITAA 1997. Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gains tax event relating directly to compensation or damages you receive for any wrong or injury you or your relative suffers. Section 118-37 of the ITAA 1997 will apply to the compensation payment you received so that any capital gain or capital loss you make will be disregarded. The compensation lump sum payment you received is therefore not taxable and does not need to be included in your income tax return. | Detailed Reasoning - Interest income: Interest income is ordinary income and therefore is assessable under section 6-5 of the ITAA 1997. In your case, you have earned interest income in relation to the compensation lump sum received. This interest income is taxable and therefore needs to be included in your income tax return.

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