Private ruling: Capital Gains Tax
Published: June 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the settlement payment you received from a court settlement subject to income taxation? | A1: No

Relevant facts and circumstances: You had day surgery. Following the surgery you suffered symptoms of abdominal pain. Further surgery was performed. You commenced proceedings in court. The proceedings were settled. The defendant accepted no liability in the settlement with a payment made to you.

Relevant legislative provisions: Section 104-25 of the Income Tax Assessment Act 1997 | Section 118-37 of the Income Tax Assessment Act 1997

Reasons for decision: Detailed Reasoning - Income: Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources 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 • have an element of periodicity, recurrence or regularity. In your case, the compensation is a one-time payment for an injury you suffered. It is not received with any regularity or recurrence. It is neither relied upon nor expected. The compensation payment does not meet the definition of ordinary income and is therefore not assessable. | Detailed Reasoning - Capital Gain: Under section 104-25 of the ITAA 1997, Capital Gains Tax (CGT) event C2 happens if your ownership of an intangible CGT asset ends by the asset being abandoned, surrendered or forfeited. The time of the CGT event is when the contract that ends the asset is entered into, or if there is no contract, when the asset ends. Legal or equitable rights that are not property are CGT assets under section 108-5 of the ITAA 1997. A capital gain or loss made from a CGT event relating to compensation or damages you received for any wrong, injury or illness you suffer personally is disregarded under section 118-37 of the ITAA 1997. In your case, you had an intangible CGT asset in the form of a legal right to pursue compensation. A CGT event occurred when you entered a settlement agreement resulting from pursuing that legal right. You have made a capital gain from this event. However, it will be disregarded as it is compensation received for a personal wrong or injury that you suffered (regardless of liability not being accepted).