Private ruling: Assessability of your lump sum compensation payment
Date of advice: 14 October 2016
Published: January 2017
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is your lump sum compensation payment assessable income? | A1: No. | Q2: Is there any capital gain with the compensation payment you received? | A2: No.

Relevant facts and circumstances: You were injured in a workplace accident. You incurred medical costs associated with your injury. You applied for compensation for the costs of the surgery for the injury. You and your employer attended mediation and a settlement was reached. The settlement you agreed to was a lump sum payment as well as all your unused annual leave and unused pro-rata long service leave paid out to you. You are aware that your payment for your unused annual and long service leave will be assessable income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Paragraph 118-37(1)(a)

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 compensation you received was not income from rendering personal services, income from property or income from carrying on a business. The payment is also a one off payment and thus it does not have an element of recurrence or regularity. Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However no component of the amount you received was received to compensate for loss of income. Accordingly, no part of the lump sum compensation payment is assessable under section 6-5 of the ITAA 1997. Capital gains Additionally, paragraph 118-37(1)(a)(ii) of the ITAA 1997 needs to be considered as this operates to disregard a capital gain or capital loss from a capital gains tax (CGT) event which relates directly to compensation or damages received for any wrong or injury suffered by a person personally. Accordingly, in your case, the compensation received was for an injury suffered by you in your workplace. The 'injury' suffered for the purposes of paragraphs 118-37(1)(a) or (b) of the ITAA 1997 is the loss that you have suffered and therefore, the lump sum payment is exempt from CGT. In conclusion, you will not be subject to capital gains tax in respect of the amount you received to compensate you for the injuries you received.