Private ruling: The assessability of a lump sum compensation payment received
Date of advice: 9 January 2019
Published: April 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the lump sum payment, or any portion thereof, made pursuant to a workers compensation claim be assessable as either ordinary income or a capital gain? | A1: No

Relevant facts and circumstances: You are employed. You sustained injuries in the course of your employment. As a result of the injuries, you submitted a claim for compensation. Your employer, through its insurer has agreed to resolve your entitlement to compensation by entering into an Agreement for payment of a lump sum. Under the Deed of Agreement you have agreed to settle your claim/entitlements arising from injuries sustained in the course of your employment.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 paragraph 118-37(1)(a)(i)

Reasons for decision: Detailed Reasoning - Ordinary Income: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, 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, and ● have an element of periodicity, recurrence or regularity. Payments of salary and wages are income according to ordinary concepts and are included in your assessable income. An amount paid to compensate for loss generally acquires the character 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 according to ordinary concepts ( FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411). | Detailed Reasoning - Lump sum payments: Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable. In your case you were making a claim for workers’ compensation. You have now been offered a lump sum payment to give up your claim for workers compensation with your employer and their insurer. The lump sum settlement to be received does not relate to personal services, property, or the carrying on of a business. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from the performance of personal services. In your circumstances, the lump sum payment is not for loss of income and not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income, and are also included in assessable income. Amounts received as a lump sum are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997. | Detailed Reasoning - Capital gains: Part 3-1 of the ITAA 1997 contains the capital gains and capital loss provisions commonly referred to as the CGT provisions. You make a capital gain or capital loss if a CGT event happens in respect of a CGT asset. Section 104-25 of the ITAA 1997 provides that CGT event C2 happens on the ending of the right to seek compensation, that is, the right to take legal action. The lump sum amount you will receive will be capital proceeds for this CGT event and a capital gain will usually arise. The net capital gain you make is then included in your assessable income under section 102-5 of the ITAA 1997. | Detailed Reasoning - CGT Exemption: Paragraph 118-37(1)(a)(i) of the ITAA 1997 allows a capital gain to be disregarded if it is compensation or damages you receive for any wrong or injury you suffer in your occupation. In your case, your lump sum payment is not considered ordinary income as it is capital in nature. Capital payments would ordinarily be assessable under the capital gains provisions however as the payment was compensation received for an injury you suffered in your occupation, any capital gain will be disregarded.