Private ruling: Assessability of a lump sum
Date of advice: 3 October 2019
Published: November 2019
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Question and answer | Is the lump sum payment of $X you received to settle your claim to receive monthly income payments assessable income? | Yes.

Relevant facts and circumstances: You received a lump sum payment under a Deed of Release (the Deed) with an insurer. You were insured with an insurer under a Policy (the Policy) through your former employer. You did not pay any sum to your former employer or the insurer to be insured under the Policy so as to be a 'Member' under the Policy. A number of incidents occurred in your workplace. You suffered injury and illness as a result of the incidents. The insurer paid you monthly benefits on the basis you were suffering a total disability under the Policy. Your last rate of monthly benefits was $X. The insurer later declined to make further payments to you alleging that you no longer suffered a total disability. You disputed the insurer's decision through your lawyers. You obtained a medical opinion showing that you suffered these disorders. The opinion stated you could not return to your previous line of employment. The insurer agreed to resolve your claim by way of a lump sum payment to you. In consideration of the payment you agreed to give up your rights to claim against the insurer as Releasee in respect of the Policy. The alternative for you was further protracted legal action which you decided against. If the policy had continued you would have received monthly payments of $X indexed until you turned 65. The lump sum was much less that the present value of future policy payments.

Relevant legislative provisions: Income tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, 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: Payments of salary and wages are examples of ordinary income. Receipts that are not salary or wages but are paid as a substitute for salary or wages that would normally have been earned, expected and relied upon by a taxpayer are also assessable as ordinary income. The general principle is that such payments take on the character of the salary or wages they replace. That is, if the substituted amount was an amount of ordinary income, the amount paid to compensate for the loss of that amount will also be ordinary income. In your case, the lump sum payment was paid to you because you agreed to give up your right to receive regular monthly payments from the insurer under the Policy. As the payment is compensating you for income that would have been assessable income, this payment is therefore treated as also being assessable income and must be included in your income tax return in the year that you received the payment.

have an element of periodicity, recurrence or regularity.