Private ruling: Assessability of compensation
Published: October 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the lump sum benefit you received assessable income? | A1: No.

Relevant facts and circumstances: You are a salaried employee. You received a specific injury benefit through your employer's insurance. You are not required to pay any fee or premium to be a member of the plan. Your employer pays a single annual premium to the insurer to cover all eligible employees. You received a lump sum benefit equivalent to three times your gross monthly salary, after you sustained a personal injury. You suffered this injury at home and it was not a work related injury. The terms to be eligible for the benefit are that an insured member suffers a specific injury requiring an immobilisation device, such as a plaster cast or brace. There were no requirements for any form of disablement or incapacity to work in your regular occupation. You took approximately X full days and X half days off work to recover. You continued to receive your regular pay (including sick leave benefits) during this period.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) section 6-5 | Income Tax Assessment Act 1997 (ITAA 1997) section 6-10 | Income Tax Assessment Act 1997 (ITAA 1997) section 118-37

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. In your case, the lump sum payment you received is not earned it will be a one-off payment and does not have an element of recurrence or regularity. Although the payment may be said to be expected, and perhaps relied upon, this expectation arose from a personal injury that you suffered, rather than from a relationship to income earning activities. Accordingly, the lump sum you received in relation to a personal injury you suffered is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. Amounts received in respect of personal injury which is not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997. Taxation Ruling TR 95/35 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 (namely, the right to sue). However, paragraph 118-37(1)(b) 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.....suffer personally'. Therefore, any capital gain that may arise from the receipt of the lump sum payment for the pain and suffering you endured will be disregarded. Accordingly, the lump sum payment is not assessable as either ordinary or statutory income.