Private ruling: Lump sum payment
Published: December 2011
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

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 degenerative disease. As a result of your condition, you made a Total and Permanent Disability (TPD) claim through your superannuation funds insurer. The insurer refused your claim. You lodged a complaint with the Superannuation Complaints Tribunal (the tribunal). Your complaint was accepted by the tribunal. You were made an offer to settle the dispute. The offer by the insurer was made without admission of liability and in full and final settlement satisfaction and discharge of all claims. You agreed upon execution of the settlement agreement to withdraw your complaint lodged with the tribunal in accordance with section 21 of the Superannuation (Resolution of Complaints) Act 1993. You accepted the offer and the lump sum payment has been distributed as per the settlement agreement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

Reasons for decision: Summary: 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 through the tribunal where entitlement to receive a payment under a 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.

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