Private ruling: Compensation
Date of advice: 5 August 2025
Published: 7 October 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the lump sum payment from the Government of Country A assessable in Australia? | A1: No. | Q2: Are the benefit payments you receive from the Government of Government of Country A assessable income in Australia? | A2: Yes.

Relevant facts and circumstances: You are a resident of Australia for tax purposes. On DDMM20YY you made a claim in Country A under the relevant Workers' Compensation Act. In Country A, Benefit X is for people who are disabled because of an accident at work or who have certain diseases caused by their work. It is a no-fault scheme paid by Country A. The amount you receive depends on the level of your disability. Under Country A domestic tax law, the benefit payments are not subject to taxation. The Government of Country A determined that you had a disease covered by the relevant Workers' Compensation Act. It was decided that the prescribed disease has caused you a loss of faculty. By loss of faculty, they mean some loss of power or function to a part of your body. You are assessed as having disablement of X from DDMM20YY. You received the following correspondence from the Government of Country A • letter dated DDMM20YY advising the Government of Country A: will pay you benefit X from DDMM20YY.These payments will be made every X weeks ongoing with a review period of X years. • letter dated DDMM20YY, advising you have been awarded a lump sum payment of X monies to be paid to you within X weeks of DDMM20YY.

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 104-25 | Income Tax Assessment Act 1997 Section 118-37 | International Tax Agreements Act 1953 The Convention between Australia and Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains

Reasons for decision: Detailed Reasoning - Issue 1: Compensation | Summary: The lump sum payment you received is compensation for a 'wrong or injury you have suffered in your occupation'. However, the lump sum payment was neither a revenue receipt directly related to your employment nor was it considered to be a payment for lost income. Further it was a one-off payment and does not have an element of recurrence or regularity. Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payments will not be assessable as statutory income | Detailed Reasoning - Detailed reasoning: Statutory income Subsection 6-10(4) of the ITAA 1997 provides that assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is capital gains (section 102-5 of the ITAA 1997). Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. Taxation ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts discusses the CGT implications for compensation receipts. Why the payment was made is an important factor in determining whether an asset has been disposed of for CGT purposes. TR 95/35 discusses the various scenarios, including: • disposal of the underlying asset, • compensation for permanent damage to, or permanent reduction in value of, the underlying asset, and • disposal of the right to seek compensation. The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation. In your case, as outlined in the summary above, subparagraph 118-37(1)(a)(i) of the ITAA 1997 applies. This means the lump sum payment is not assessable as ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.We consider the lump sum payment was received as compensation for a 'wrong or injury you have suffered in your occupation'. The lump sum payment was not a revenue receipt directly related to your employment. The payment was not considered to be a payment for lost income. Further it was a one-off payment and does not have an element of recurrence or regularity. Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under and the payments will not be assessable as statutory income. Issue 2 Weekly benefit payments | Summary: In your case, as a result of your claim, you have been awarded Benefit X, because it was decided that the prescribed disease has caused you a loss of faculty. The benefit is a weekly payment received from Country A Government. These payments retain the characteristics of income as they are expected, relied upon and have the element of recurrence or regularity and are fully assessable as ordinary income. As such, Benefit payments X will be ordinary income and assessable under section 6-5 of the ITAA 1997 unless overridden by some other statutory provisions. | Detailed Reasoning - Detailed reasoning: Ordinary Income Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the 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: • are expected, • are relied upon, and • have an element of periodicity, recurrence or regularity. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). In Scott v. FC of T (1966) 14 ATD 286, Windeyer J expressed the view that whether or not a particular receipt is income depends upon its quality in the hands of the recipient. Double tax agreement between Australia and Country A In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The relevant agreement is located on the Austlii website ( www.austlii.edu.au ) in the Australian Treaties Series database. The Country A agreement operates to avoid the double taxation of income received by residents of Australia and Country A. Article X (Other income) of the Country A agreement sets out rules for incomes not dealt with in the other Articles of the agreement. Article X of the Country A agreement states that: • Items of income beneficially owned by a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State. Article X of the Country A agreement states that: • Notwithstanding the provisions of paragraphs 1 and 2 of this Article, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention from sources in the other Contracting State may also be taxed in the other Contracting State. In your case, both Australia and Country A have taxing rights for the benefit payments. In Country A Benefit payments X are not subject to taxation. However, as a resident of Australia for taxation purposes, you are required to include the assessable amount from Benefit X payments in your income tax return.