Private ruling: Compensation - work related injury - lump sum payment
Date of advice: 1 November 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the lump sum payment benefit received for damages arising from an injury sustained in an accident at work ordinary income? | A1: No | Q2: Will any capital gains arising from the lump sum payment benefit received for damages arising from an injury sustained in an accident at work be disregarded? | A2: Yes

Relevant facts and circumstances: You were a professional contractor contracted with the relevant Australian authority and also a local Australian regional authority. You had a legally binding employment contract with the abovementioned authorities. As a professional contractor you had a Personal accident and sickness insurance policy which was held in the name of the relevant authority, and you were listed as the beneficiary. The purpose of the insurance cover is to provide a capital amount to the insured if the insured suffers a specified medical condition as diagnosed and certified by a medical practitioner and agreed to by the insurer. The policy provides for a choice of either a lump sum payment or a number of equal instalments in the event of death, serious medical conditions, major surgery or total and permanent disablement. In 20XX during the course of your employment you sustained an injury which forced you into early retirement from your vocation, meaning that you were unable to continue your employment. Under the terms of the insurance policy a lump sum payment benefit was payable upon the diagnoses of your medical condition. As such you made the appropriate claim on the insurance policy, electing to receive the amount as a lump sum payment, and you were assessed as being permanently disabled by the Medical professionals as defined by the policy. The lump sum payment was made to the holder of the insurance policy (the relevant authority) and the association transferred this amount to your bank account as beneficiary in late 20XX. You announced your retirement from your vocation at this time.

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 15-30. | Income Tax Assessment Act 1997 Section 102-5. | 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 a taxpayer includes income according to ordinary concepts (ordinary income). 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; and ● have an element of periodicity, recurrence or regularity. A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. In your case you received a compensation payment that is not income from rendering personal services, income from property or income from carrying on a business. The payment is a one-off payment for a specified event that occurred (the injury sustained during you’re the course of your employment in 20XX) 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 the pain and suffering 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. Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 or section 15-30 of the ITAA 1997 in the 2016-17 financial year. | Detailed Reasoning - Capital gains arising from the compensation payment: 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 15-30 of the ITAA 1997 which provides that your assessable income includes an amount you receive by way of insurance or indemnity for the loss of income if: ● the lost amount would have been included in your assessable income: and ● the amount received is not ordinary income under section 6-5 of the ITAA 1997. In your case the payment received was not for loss of income. Also included in this list is section 102-5 of the ITAA 1997 which deals with capital gains. However, paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally. Accordingly, in your case, the compensation received was for an injury suffered by you in your workplace. The ‘injury’ suffered for the purposes of paragraphs 118-37(1)(a) of the ITAA 1997 is the loss that you have suffered and therefore, any capital gain arising from that is disregarded. Accordingly, the compensation payment you received is not assessable under section 6-5 of the ITAA 1997, or section 6-10 of the ITAA 1997.