Private ruling: Assessability of compensation payment
Published: February 2012
Ruling period: 1 July 2011 to 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Question and answer: | Is the lump sum compensation payment you received included in your assessable income. | No.

Relevant facts and circumstances: You were injured in a motor vehicle at work. You received a lump sum compensation payment. No component of the lump sum amount was related to a loss of income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 102-5. | Income Tax Assessment Act 1997 Section 118-37.

Reasons for decision: Detailed Reasoning - Assessable income - general: The assessable income of an Australian resident taxpayer may include amounts of ordinary and statutory income. Salary and wages are an example of ordinary income and are included in a taxpayer's assessable income under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Capital gains are an example of statutory income and are included in a taxpayer's assessable income under the provisions of section 102-5 of the ITAA 1997. | Detailed Reasoning - Assessability of compensation payments: Compensation payments which are a substitute for income (salary and wages for example) have been previously held by the courts to be assessable as ordinary income ( FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433). This position by the courts is reflected in Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? which contains the Australian Taxation Office view on the circumstances in which the receipt of a lump sum compensation payment will be assessable as ordinary income in the hands of the recipient. Taxation Determination TD 93/58 specifies that such a payment will be assessable as ordinary income: § if the payment is for loss of income only, or § to the extent that a portion of the payment is identifiable and quantifiable as being related to a loss of income. In your case, no portion of the lump sum you received was to compensate you for loss of income. Compensation amounts received that can not be directly attributable to loss of income will usually be capital in nature and potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997. However, subsection 118-37(1)(a) of the ITAA 1997 provides that a taxpayer may disregard any capital gain arising from the receipt of compensation paid as a result of an injury suffered in their occupation. In your case, you suffered an injury when you were involved in a motor vehicle accident at work. As a result, you can disregard any capital gain arising from the payment of the lump sum amount. | Detailed Reasoning - Conclusion: No portion of the lump sum amount will be included in your assessable income for taxation purposes.

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