Private ruling: Compensation payments
Date of advice: 12 October 2018
Published: December 2018
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is receipt of the compensation amount considered as assessable income? | A1: No. Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However no component of the amount offered was to compensate for loss of income. The portion relating to past economic loss is compensation for loss of earning capacity (a capital asset) rather than for actual loss of income. The payment will not be an assessable income by virtue of the CGT provisions. Under paragraph 118-37(1)(a) of the ITAA 1997 you do not need to include the payment in your tax declaration should you accept the offer.

Relevant facts and circumstances: You were injured in a motor vehicle accident. You lodged a motor vehicle accident claim with your compulsory third party (CTP) insurer. You were unable to work for a number of months. Later, you worked on reduced hours up until your doctor allowed you to return to work. The Insurer offered you an amount in full and final satisfaction of all present and future claims against the insurer. The settlement offer indicated payment for past economic loss, superannuation on unpaid sick leave and interest. The letter noted that your total economic loss was based from your average weekly earnings. The calculated amount was discounted by a statutory reduction pursuant to the relevant state legislation. The legislation in the relevant state governing compulsory third party insurance provides for payment of ‘damages for loss of earning capacity’. The legislation does not provide for compensation for actual loss of income. The Insurer advised you that the amount offered is not assessable income and does not have to be declared in your tax return.

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 10-5 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 paragraph 118-37(1)(a)