Private ruling: Compensation
Date of advice: 19 June 2017
Published: October 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the lump sum payment you will receive assessable as ordinary income or as a capital gain? | A1: No.

Relevant facts and circumstances: You have suffered a workplace injury resulting in XX% whole person impairment. You are entitled to a lump sum payment for non-economic loss. The amount of the payment is depending on the percentage of whole of body impairment assessed.

Relevant legislative provisions: Income Tax Assessment Act section 6-5 | Income Tax Assessment Act section 6-10 | Income Tax Assessment Act section 104-25 | Income Tax Assessment Act subparagraph 118 37(1)(a)(i)

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 resident taxpayer includes ordinary and statutory income (for example, capital gains) derived directly and indirectly from all sources, whether in or out of Australia during the income year The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income, as are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts. In your case, you are entitled to a lump sum payment for non-economic loss. The lump sum payment has no characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity, nor is it paid to compensate for loss of income. Therefore, the lump sum amount will be capital in nature, being a payment for the loss of body functionality in respect of your injury or injuries, and will not be assessable as ordinary income. | Detailed Reasoning - Statutory income: The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation. In your case, the lump sum payment will be received as compensation for a 'wrong or injury you have suffered in your occupation’, being the loss of body functionality in respect of your workplace injury/injuries. Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118 37(1)(a)(i) of the ITAA 1997 and the payment will not be assessable as statutory income. As the lump sum payment is not assessable as either ordinary or statutory income, you would not be required to include the amount in your assessable income.