Private ruling: Assessability of your lump sum compensation payment
Date of advice: 2 August 2018
Published: November 2017
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is your lump sum compensation payment assessable as ordinary income? | A1: No. | Q2: Did capital gains tax (CGT) event C2 happen when you entered into the Deed of Settlement and Release? | A2: Yes. | Q3: Are you entitled to apply the general 50% discount to your capital gain? | A3: Yes.

Relevant facts and circumstances: You sustained an injury said to have arisen from your employment. You made two claims for compensation pursuant to the Return to Work Act 2014 (relevant state) (RWA) in which were both rejected. Your employment was terminated in late 201X. In late 201X, you made a claim with the Fair Work Commission for unfair dismissal. This claim was dismissed in mid 201Y. You disputed both rejected determinations from relevant state WorkCover with the relevant state Employment Tribunal (ET). Both parties agreed to resolve the ET proceedings with a settlement payment pursuant a Deed of Settlement and Release (the deed).

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(2) | 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 118-37(1) | Income Tax Assessment Act 1997 section 115-25

Reasons for decision: Summary: Ordinary Income Your assessable income includes income according to ordinary concepts, which is called ordinary income as per section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). 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. Compensation payments are considered to be ordinary income where the payments are compensation for the loss of income or where some portion of the payment is identifiable and quantifiable as income. In your case, the lump sum payment you will receive is not for loss of income, nor is any part of it identifiable as income. As such, the lump sum payment is not assessable as ordinary income under section 6-5 of the ITAA 1997. Capital gains tax Your assessable income includes your net capital gain for the income year (subsection 102-5(1) of the ITAA 1997). You make a capital gain (or loss) as a result of a CGT event happening (section 102-20 of the ITAA 1997). CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being released or cancelled (subsection 104-25(1) of the ITAA 1997). The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends (subsection 104-25(2) of the ITAA 1997). A CGT asset is any kind of property or a legal or equitable right that is not property (section 108-5 of the ITAA 1997). In your case, your right to seek compensation for an injury said to of arisen from your employment is an intangible CGT asset (acquired at the time of the compensable wrong) and your ownership of that asset will end when you enter into the deed. At that time CGT event C2 will occur. Capital proceeds The capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening, and the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event) (section 116-20 of the ITAA 1997). You will make a capital gain if those proceeds are more than the right’s cost base. Cost base The cost base of the right to seek compensation is determined in accordance with the provisions of section 110-25 of the ITAA 1997. The cost base of a CGT asset consists of 5 elements (subsection 110-25(1) of the ITAA 1997). The first element includes in the cost base any consideration in respect of the acquisition of the right to seek compensation (subsection 110-25(2) of the ITAA 1997). As a general rule, a taxpayer does not pay or give any money or property to acquire the right to seek compensation. The second element is the incidental costs you incurred to acquire a CGT asset or that relate to a CGT event (subsection 110-25(3) of the ITAA 1997). Incidental costs include remuneration for the services of accountants, financial advisers and legal adviser (subsection 110-35(2) of the ITAA 1997). However, expenditure does not form part of the second element of the cost base to the extent that you have deducted it or can deduct it (subsection 110-45(1B) of the ITAA 1997). The other three elements are not relevant to your circumstances. 50% general CGT discount Section 115-25 of the ITAA 1997 generally allows any individual to apply a 50% discount to any capital gain provided that the CGT event to which the capital gain relates occurs at least 12 months after the asset is acquired. You acquired the right to seek compensation when you sustained an injury said to have arisen from your employment. You will dispose of this right when you enter into the deed. As your right to seek compensation was acquired more than 12 months before the disposal will occur, you can apply the 50% general discount to the capital gain from CGT event C2 happening.