Private ruling: Compensation payment
Published: May 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the lump sum payment you received assessable? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-15(1) | Income Tax Assessment Act 1997 paragraph118-37(1)(b)

Reasons for decision: Summary: 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 includes receipts that: • are earned; • are expected; • are relied upon; and • have an element of periodicity, recurrence or regularity. In your case, the payment you received was not from rendering personal services, income from property or income from carrying on a business. Although the payment may have been expected and relied upon, it was not earned and was received in a lump sum. Therefore, the payment you received is not assessable as ordinary income. | Detailed Reasoning - Capital gains tax (CGT): Amounts received in respect of personal injury which are not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the CGT provisions of the ITAA 1997. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Therefore, any capital gain that may arise from the receipt of the lump sum payment for injury will be disregarded.

Relevant facts: As the result of a fall, you sued a company and received a lump sum payment.