Private ruling: Compensation
Date of advice: 7 November 2017
Published: March 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of your lump sum payment assessable as ordinary income or as a capital gain? | A1: No

Relevant facts and circumstances: You suffer from a medical condition said to have resulted from your employment. You are a member of a superannuation fund which entered into a Group Life Insurance Policy in respect of the fund. As a result of your condition, you made a Total and Permanent Disability (TPD) claim against your superannuation funds insurer. The claim included the contention that as a result of your medical condition you ceased employment. Your superannuation fund’s insurer assessed the TPD claim and declined it by letter to the fund. You filed a Statement of Claim against the superannuation fund and the insurer to the fund. Your superannuation fund and its insurer deny they are liable in any way to you in respect of the claims and without any admission of liability they and you have agreed to resolve the claim. Your superannuation fund and its insurer agreed to pay a settlement sum noted in a deed of release, in full and final settlement without admission of liability. You propose to accept the offer, and agree to a release and indemnity of your superannuation fund and its insurer from any further claim or liability in respect of this matter. The lump sum settlement will be paid to your solicitors trust account.

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 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for taxation purposes as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). 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 lump sum payment you accepted is not income from rendering personal services, income from property or income from carrying on a business. The payment is also not earned, expected, relied upon and is a one off payment and thus it does not have an element of recurrence or regularity. Your settlement is a result of you making a complaint where entitlement to receive a payment under a Total and Permanent Disability (TPD) claim was in dispute. It is not a lump sum payment which substitutes for an income stream but rather for entering into a settlement agreement with the insurer for the purpose of surrendering your rights under the policy. The lump sum payment is a capital receipt and is not ordinary income. Therefore the amount is not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: 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. 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 payment or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness. The lump sum you received is considered to be exempt from CGT under paragraph 118-37(1)(b). | Detailed Reasoning - Conclusion: As the amount is not ordinary or statutory income it is not assessable income. Therefore no part of the settlement amount is required to be included in your income tax return.