Private ruling: Compensation payment
Date of advice: 27 October 2015
Published: October 2015
Ruling period: Year ended 30 June 20YY
Date scheme commenced: Mid-August 20XX

Ruling: Question and answer | Is any part of your lump sum payment assessable as ordinary income or as a capital gain? | 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 Paragraph 118-37(1)(b)

Reasons for decision: Summary: Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year. 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 • have an element of periodicity, recurrence or regularity. The lump sum payment you accepted is not income from rendering personal services, income from property or income from carrying on a business. The payment is also not earned, expected, relied upon and is a one off payment and thus it does not have an element of recurrence or regularity. The lump sum payment is not considered to be ordinary income. | Detailed Reasoning - Capital gains tax: Receipt of a lump sum payment may give rise to a capital gain (statutory income). However paragraph 118-37(1)(b) of the ITAA 1997 disregards payment or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness. The lump sum you received is considered to be exempt from CGT under paragraph 118-37(1)(b). | Detailed Reasoning - Conclusion: As the amount is not ordinary or statutory income it is not assessable income. Therefore no part of the settlement amount is required to be included in your income tax return.

Relevant facts: You were employed by your past employer for over 30 years. | You were exposed to continual hazards without proper protection. | In 20YY you were diagnosed with a medical condition. | You lodged a compensation claim for permanent impairment. | It was determined that you were entitled to: | • An amount for permanent impairment. | • An amount for non-economic loss. | You have provided documentation regarding the settlement.