Private ruling: Assessable income – compensation payment and ordinary income
Date of advice: 18 February 2019
Published: May 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the lump sum compensation payment you received assessable income? | A1: No | Q2: Is the three months ordinary salary you received in lieu of notice as provided for in the contract of employment, assessable income? | A2: Yes

Relevant facts and circumstances: You commenced employment with Company A on XX June 20XX. You suffered a medical injury as a result of a workplace incident. You lodged a workers compensation claim on XX October 20YY. The claim was subject to a medical assessment which confirmed the injury. Following the diagnosis, it was decided the Employer and Employee part ways, you and your Employer entered into a deed of settlement on XX December 20YY and you lodged your resignation effective from this date. The Employer, without any admission of liability whatsoever, agreed to pay the Employee: 1. Three months ordinary salary in lieu of notice as provided for in the contract of employment, and 2. Damages in the amount of $X for the psychological injury sustained. Following acceptance of the settlement by the Employer, you withdrew your workers compensation claim and agreed the settlement sum is a payment for full and final settlement of any claim in relation to medical injury. On XX December 20YY a payment of $X was paid to you for ordinary salary by the Employer and paid into your Lawyers trust account. The amount of $X was paid for medical damages sustained, and as agreed, an amount of $X was retained by the Employer for the purpose of Medicare Compensation Recovery. The Department of Human Services has been notified of the settlement in accordance with section 23 of the Health and Other Services (Compensation) Act 1995 .

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997 ) Section 6-5

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 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. You were a victim of workplace incident and as a result suffered medical injuries. You have now received a lump sum payment for these injuries. The lump sum payment was not earned by you as it does not relate to services performed. The payment is also a one off payment and thus it does not have an element of recurrence or regularity. Although the lump sum payment can be said to be expected, and perhaps relied upon, this expectation arises from the medical injuries, rather than from a relationship to personal services performed. Accordingly, the lump sum payment for damages is not ordinary income and is therefore, not assessable under section 6-5 of the ITAA 1997. However, the three months ordinary salary you received in lieu of notice as provided for in the contract of employment is assessable income as it is for replacement of expected income. | Detailed Reasoning - Capital gains tax (CGT): 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 a capital gain where the amount relates to compensation or damages received for any ‘wrong, injury or illness you or your relative suffer personally’. The lump sum you received is considered to be exempt from CGT.