Private ruling: Assessable income
Date of advice: 18 March 2019
Published: May 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the lump sum compensation payment you received included in your assessable income? | A1: No.

Relevant facts and circumstances: You sustained a personal injury. You made a claim under a compulsory third party state government insurance scheme and received a settlement payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2), | Income Tax Assessment Act 1997 Section 6-10 and | Income Tax Assessment Act 1997 paragraph 118-37(1)(a)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, 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, and ● have an element of periodicity, recurrence or regularity. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). Damages awarded for past or future loss or impairment of earning capacity is not ordinary income ( Groves v. United Pacific Transport Pty Ltd [1965] Qd R 62). The capacity to earn income is a capital asset and compensation for the loss of a capital asset is a capital receipt and is not ordinary income. Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation/settlement payment is assessable, and states that such a payment is assessable income: ● if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined), or ● to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature. In your case, the motor vehicle third party insurance legislation under which your claim was made provides for compensation for loss of earning capacity, not loss of income. Taxation Ruling IT 2193 makes it clear that compensation for loss of earning capacity will not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to amounts of income lost. The lump sum payment you received is not earned by you as it does not relate to services performed. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from your personal injury and claim submitted, rather than from a relationship with personal services performed. As no component of the amount you received was to compensate you for loss of income, the payment is not assessable as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital Gain: Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income. Receipt of a lump sum payment may give rise to a capital gain (statutory income). However paragraph 118-37(1)(a) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness. In your case, the payment was made to you as a result of a personal injury, and as such the payment will be exempt from capital gains tax under paragraph 118-37(1)(a) of the ITAA 1997.