Private ruling: Assessability of lump sum compensation payment
Published: September 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Is the lump sum compensation payment assessable as ordinary income or as a capital gain? | No.

Relevant facts and circumstances: In the 2014 income year, you received a lump sum payment in settlement of your claim made under a Personal Accident and Sickness Policy. Under the terms of the deed of release, upon payment of the settlement sum, you release and discharge entity X from the claim and all matters from and incidental to it.

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)(b)

Reasons for decision: Detailed Reasoning - Ordinary income: Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources 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 earned • are expected • are relied upon • have an element of periodicity, recurrence or regularity. The compensation amount you have accepted is not income from rendering personal services, income from property or income from carrying on a business. The payment is also a one-off payment and thus it 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 the pain, suffering and medical treatment required resulting from the injury, rather than from a relationship to personal services performed. Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However no component of the amount you will receive is received to compensate for loss of income. Accordingly, no part of the lump sum compensation payment will be assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains. Amounts received in respect of personal injuries which are not for reimbursements 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. The disposal of a taxpayer's right to seek compensation triggers the capital gains tax provisions and the settlement amount is treated as capital proceeds. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain where the amount relates to compensation or damages received for any 'wrong, injury or illness you ... suffer personally'. In your case, you will not be subject to capital gains tax in respect of the amount you received to compensate you for the injury you incurred.