Private ruling: Lump sum payment
Date of advice: 25 February 2016
Published: April 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Question and answer | Will the lump sum compensation payment be assessable? | No.

Relevant facts and circumstances: Your spouse passed away as a result of an accident. An insurance company has made you a compensation offer.

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 10-5 | Income Tax Assessment Act 1997 Section 15-30 | 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 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. In your case, you will receive a lump sum amount from an insurance company in relation to the loss of your spouse in an accident. The lump sum you will receive will not be earned by you 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 loss of your spouse, rather than from a relationship to personal services performed. Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However no component of the amount received was received to compensate for loss of income. 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 are section 15-30 of the ITAA 1997 which deals with insurance recoveries and section 102-5 of the ITAA 1997 which deals with capital gains. Section 15-30 of the ITAA 1997 operates to include in a taxpayer's assessable income any amount received by way of insurance or indemnity for the loss of an amount of income if the lost amount would have been included in the taxpayer's assessable income but was not assessable under section 6-5 of the ITAA 1997. The compensation amount you will receive would not have been included in your assessable income and therefore section 15-30 of the ITAA 1997 will have no application. An amount received in respect of a wrong, injury or illness which is not compensation for loss of income will usually be capital in nature and is potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997. Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. As the amount you will receive is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a capital gains tax (CGT) event (CGT event C2) happening to your right to seek compensation. 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 suffers personally. Consequently, as you will receive a lump sum payment in relation to the loss of your spouse, paragraph 118-37(1)(b) of the ITAA 1997 will apply to disregard any capital gain you make from the receipt of the amount.