Private ruling: Compensation payment
Published: June 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the lump sum compensation payment you will receive assessable income? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You sustained injuries in an accident. You made a claim in respect of your injuries. You have accepted an offer of settlement. You have provided a copy of the Deed of Release which apportions your entitlements.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 102-5 and | Income Tax Assessment Act 1997 paragraph 118-37(1)(b).

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 taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has been held to include income from providing 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 · have an element of periodicity, recurrence or regularity The portion of the payment relating to pain and suffering, loss of chance, medical expenses, voluntary services, future paid assistance, interest and legal costs 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, suffering and medical treatment required resulting from the injury, rather than from a relationship to personal services performed. Taxation Ruling IT 2193 deals with the issue of compensation for loss of earning capacity (also known as 'loss of chance') arising from a motor vehicle accident. 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 the amount of income the taxpayer would have earned. Medical expenses are private expenditure. Therefore, payment for future medical expenses does not give rise to assessable income. Accordingly, the lump sum payment you will receive is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. Section 102-5 of the ITAA 1997 provides that assessable income includes net capital gains for the income year. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally. As the compensation amount you will receive is not assessable as either ordinary income or statutory income, no part of it is included in your assessable income.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.