Private ruling: Compensation payment
Published: December 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Will you have to pay tax on the lump sum you received as compensation as a victim of crime? | A1: 

Relevant facts and circumstances: You were present at a business when it was burgled and subsequently sued the state for stress and suffering. You received a lump sum payment as compensation for stress suffered.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 6-10 and | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. 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. The payment you received was payable to you by the state as compensation for the stress suffered during a break in. The payment does not have the characteristics of ordinary income and was not earned by you and did not relate to services performed. The payment is also a one-off payment and 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 your stress suffered. The lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital Gain: Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income. Receipt of a lump sum payment may give rise to a capital gain (statutory income). However paragraph 118-37(1)(b) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation or damages a person, (or a relative of the person), receives for any personal wrong, injury or illness. In your case, the payment was made to you directly. The payment is directly related to the personal wrong or injury you suffered, and as such the payment will be exempt from capital gains tax under paragraph 118-37(1)(b) of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.