Private ruling: Compensation payment - personal injury
Date of advice: 20 August 2025
Published: 20 October 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: XX XXXX 20XX

Ruling: Q1: Is the compensation payment you received under the deed of settlement assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. The payment was not earned by you as it does not relate to services performed. The payment is also a one-off payment and thus it 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 a relationship to personal services performed. Accordingly, the compensation payment is not ordinary income and is therefore not 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 are included in assessable income by another provision, are called statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997. | Q2: Is the payment considered a capital gain? | A2: Yes. Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a capital gains tax (CGT) asset. A taxpayer's right to seek compensation is therefore classified as an intangible CGT asset which is acquired at the time of the compensable wrong or injury. Parts 3-1 and 3-3 of the ITAA 1997 contain the capital gains and capital loss provisions commonly referred to as the CGT provisions. When an individual receives a compensation amount, there are CGT consequences. Under section 104-35 of the ITAA 1997, a CGT event D1 happens when the taxpayer suffers the wrong and a right to seek compensation is created. Section 104-25 of the ITAA 1997 provides that CGT event C2 happens on the ending of the right to seek compensation, such as the right to take legal action, when it is satisfied, surrendered, released or discharged. You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those proceeds are less than the asset's reduced cost base. A right to seek compensation is disposed of when the taxpayer agrees to a release, discharge, satisfaction or surrender of his or her right to seek compensation. This is generally at the final point of settlement of the claim and receiving the compensation as outlined at paragraph 158 of Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts . | Q3: Is the capital gain you made due to receiving the payment disregarded under subsection 118-37(1) of the ITAA 1997? | A3: Yes. In accordance with the principles contained in TR 95/35, you can disregard any capital gain made in relation to the receipt of the settlement under section 118-37 of the ITAA 1997 as the amounts are capital in nature that were received due to a wrong to you personally.

Relevant facts and circumstances: On XX XXXX 20XX, while on holiday you attended the accommodation, where you tripped whilst walking (the incident). As a result of the incident, you suffered physical injuries and psychological/psychiatric injuries including stress, anxiety and depression. On XX XXXX 20XX, you commenced proceedings in Court against the owner and occupier, in control of and responsible for the care and management of the Accommodation. You alleged that the incident and subsequent injuries were caused by a breach of a duty of care and/or negligence by the owner. On XX XXXX 20XX, you and the owner entered a deed of settlement and release (the deed), where both parties agreed without admission of liability to the full and final settlement of all matters As per the deed, you would receive a lump sum payment of $XX as settlement of the claim inclusive of your legal costs and disbursements. On XX XXXX 20XX, your lawyers received the lump sum amount of $XX. On XX XXXX 20XX, your lawyers transferred $XX into your personal account.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 subsection 108-5(1)(b) | Income Tax Assessment Act 1997 subsection 118-37(1)(a)(ii)