Private ruling: Lump sum settlement
Date of advice: 23 November 2020
Published: January 2021
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the lump sum compensation payment you received assessable as ordinary income or as statutory income other than as a capital gain? | A1: No. The payment was not earned by you as it did not relate to services performed or to your employment duties with your employer. It is also a one-off payment and it does not have an element of recurrence or regularity. Therefore, it does not have the character of ordinary income. The payment is not a superannuation benefit because the amount was not paid because you were a member of the fund and not an employee termination payment because the connection between the termination of your employment and the receipt of the payment is too remote for the payment to be considered to have been received in consequence of the termination of your employment. | Q2: Is any capital gain made by you in relation to the lump sum compensation payment disregarded for income tax purposes? | A2: Yes. Paragraph 118-37(1)(a) of the ITAA 1997 provides that a capital gain or a capital loss you make from a CGT event which relates directly to compensation or damages received by you for any wrong, illness or injury you suffer personally is disregarded. As the settlement payment you received related to a personal injury you suffered personally, any capital gain you make will be disregarded.

Relevant facts and circumstances: You were previously employed. You suffered an illness which caused you to be totally and permanently incapacitated. You retired and your employment was terminated. Your superannuation plan provided for a Total and Permanent Disablement (TPD) benefit but you did not receive a payment of that benefit. You accepted that you were not entitled to a payment of a TPD benefit under the plan's rules but you believed that the trustee of the superannuation plan had been misleading and deceptive in failing to adequately explain the plan's rules in relation to the TPD benefit. You commenced legal action against the trustee. You entered into a Settlement Deed and received a Settlement Sum.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 82-130 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 paragraph 118-37(1)(a) | Income Tax Assessment Act 1997 section 307-5