Private ruling: Compensation payments
Date of advice: 23 July 2015
Published: July 2015
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is a lump sum compensation payment for pain and suffering assessable income? | A1: No

Relevant facts and circumstances: You launched a discrimination action against your employer. The settlement of this complaint consisted of a targeted separation package, unpaid leave entitlements, and an ex gratia payment for pain and suffering.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Detailed Reasoning - Compensation lump sum payment - pain and suffering: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). 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. You launched a claim for discrimination against your employer. You have now received a settlement which includes a component for pain and suffering. 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 arises from the pain and suffering required resulting from the discrimination, rather than from a relationship to personal services performed. Accordingly, the lump sum payment is not ordinary income and is therefore, not assessable under section 6-5 of the ITAA 1997.