Private ruling: Lump sum compensation payment
Date of advice: 22 July 2017
Published: November 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is any part of the lump sum compensation payment assessable as ordinary income or as a capital gain? | A1: No.

Relevant facts and circumstances: Your relative was involved in a motor vehicle accident some years ago. You took legal action for compensation. The payment is a one off payment in full and final settlement of your claim. You have given up your rights to any future claims for compensation.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5(2) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 104-25(1) | Income Tax Assessment Act 1997 Section 118-37(1)

Reasons for decision: Detailed Reasoning - Ordinary income: Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation/settlement payment is assessable. It is considered that no component of the payment you are to receive was received to compensate you for loss of income. Therefore, your compensation payment is not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Capital gains tax: Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. Receipt of a lump sum payment may give rise to a capital gain (statutory income). Compensation payments resulting from injury can represent a disposal of an asset for CGT purposes, being your right to sue. The disposal of an asset gives rise to a CGT event (section 104-35 of the ITAA 1997). However, payments or receipts where the amount relates to compensation or damages a taxpayer receives for personal wrong, injury or illness are disregarded for CGT purposes because of paragraph 118-37(1)(b) of the ITAA 1997. Accordingly, your compensation payment received for the loss of your relative in a motor vehicle accident is exempt from capital gains tax under subsection 118-37(1) of the ITAA 1997. Therefore no part of the compensation amount is required to be included in your income tax return.