Private ruling: Compensation payment
Published: July 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the settlement amounts paid to you, as compensation, for your inability to work when required to undergo revision surgery be assessable as either ordinary or statutory income? | A1: No. | Q2: Will the compensation payments you received for out of pocket expenses associated with your undergoing revision surgery be assessable income as either ordinary or statutory income. | A2: No.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: · Application for private ruling · lawyers letter · Letter to the claim processor · Email from the claim processor · Email from the claim processor You had a surgical procedure some years ago. You have suffered a medical issue since the operation and it was recommended that you have revision surgery. Your doctor informed you that you would require time off work. At the time of your revision surgery you were employed on a contractual basis for a fixed term. You were forced to take unpaid leave until your contract finished. You expected that prior to being forced to take leave for your surgery your contract would have been renewed. Your contract was not renewed due to the time needed off work for the revision surgery. You lodged a claim for compensation through your lawyer that included loss of income, travel expenses for yourself and a person who was your carer post surgery. You have received payments due to your inability to work and for out of pocket expenses. You have been informed that there was no calculation provided for the lump sum payments you have received. Your expenses for the hospital, surgery and anaesthetist fees and surgical assistant fees were paid directly to the providers.


Reasons for decision: Detailed Reasoning - Income: 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 · have an element of periodicity, recurrence or regularity. In your case, you have received compensation as a result of your inability to work when required to undergo revision surgery. Further you have received compensation for out of pocket expenses incurred for travel and a carer associated with your revision surgery. An amount paid to compensate for loss generally acquires the characteristic of that for which it is substituted ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53: (1989) 20 ATR 1516: 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433. On the other hand, 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. Taxation Ruling IT 2193 deals with the issue of compensation of the loss of earning capacity. IT 2193 makes it clear that compensation for loss of earning capacity will not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the taxpayer would have earned. You have received a compensation payment for the loss of a capital asset, that is, the capacity to earn income, the compensation payment will be deemed a capital receipt and not ordinary income. Therefore, the compensation payment will not be assessable under section 6-5 of the ITAA 1997. Similarly, the payment you received for out of pocket expenses for the travel expenses and a carer associated with your revision surgery will not be assessable under section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision called statutory income. | Detailed Reasoning - Capital gains tax (CGT): 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 as assessable income by another provision. 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. As the amounts received by you are a final settlement and are not in respect of an underlying asset, the whole of the settlement amount is treated as capital proceeds from a CGT event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any wrong, injury or illness you suffer personally. It is considered that the revision surgery was to correct a wrong that you suffered personally. Accordingly no portion of the compensation payments is assessable as a capital gain under section 102-5 of the ITAA 1997. The compensation payments are not ordinary income and are not statutory income. Accordingly, you are not required to include any portion of the payments in your assessable income.