Private ruling: Taxation of lump sum payment
Published: February 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 01 July 2010

Ruling: Q1: Will any part of your settlement amount constitute assessable income? | A1: No. | Q2: Will any part of your settlement amount be assessable under the capital gains tax (CGT) provisions? | A2: No.

Relevant facts and circumstances: Several years ago you suffered a workplace injury. After the accident you received workers' compensation payments from your employer. You also commenced a damages action against your employer and another party for your personal injury. This action was settled out of court with an undissected lump sum in 2010.

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

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 has generally been held to include 3 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 included receipts that: · are earned · are expected · are relied upon, and · have an element of periodicity, recurrence or regularity The lump sum payment you have accepted is not income from rendering personal services, income from property or income from carrying on a business. The payment was a one off payment and thus it does not have an element of recurrence or regularity. Your settlement was a result of your legal action. It was not a lump sum payment which substituted for an income stream but rather for entering into a Deed of Release with the other parties for the purpose of settling your legal action. A nature of the payment described in the scheme generally bears the character of that which it is designed to replace. If the lump sum payment is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. The lump sum payment is a capital receipt and is not ordinary income. Therefore the amount is not assessable under section 6-5 of the ITAA 1997. 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. | 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. Receipt of a lump sum payment may give rise to a capital gain (statutory income). However, paragraph 118-37(1)(b) of the ITAA 1997 disregards payment or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness. 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. When settling with a lump sum payment you surrender your rights, not only to recover any such benefits in the action, but also to claim any further benefits to which you might now or in the future have an entitlement under your workers' compensation entitlements. As each of these claims relate to your injury, any capital gain or loss arising from the surrender of your rights under your employer's workers' compensation policy will be disregarded. Applying paragraph 118-37(1)(b) to your circumstances, the lump sum payment would not be considered as an assessable capital gain.

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