Private ruling: Assessable income - compensation payment
Published: December 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the lump sum compensation payment you received by way of a third party personal injury settlement, assessable income? | A1: 

Relevant facts and circumstances: You sustained personal injury in a motor vehicle accident. You received a lump sum compensation payment from a 3 rd party insurer in full and final satisfaction of any claims you may have in relation to the accident.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

Reasons for decision: Summary: The lump sum payment you received by way of a third party personal injury settlement is not considered to be ordinary income nor statutory income and therefore, is not included in your assessable income. | Detailed Reasoning - Detailed reasoning: 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. In your case, you have not earned the lump sum payment as it does not directly 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 the personal injury you sustained in a motor vehicle accident, rather than from any personal services performed. Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However, as you have received an un-dissected lump sum, no part of it can be considered as compensation for loss of income. Accordingly, the lump sum payment is not considered ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income also includes statutory income. Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. One such provision is section 102-5 of the ITAA 1997 which deals with capital gains. Amounts received in respect of personal injuries which are not for reimbursement of medical expenses, or direct compensation for loss of income, will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax (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. In your case, the amount received was not in respect of any underlying asset. The whole amount was received as full and final satisfaction of any claims you may have as a result of personal injury you sustained in a motor vehicle accident and, therefore, is for the disposal of any future right to right to seek compensation, a capital asset. As a result, the whole of the settlement amount is treated as capital proceeds from a capital gains tax event (CGT event C2). 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'. In your case, the payment you received was in relation to a 'wrong, injury or illness you ... suffer personally' and any capital gain will be disregarded. Accordingly, the lump sum payment you received for the personal injury you sustained in a motor vehicle accident is not assessable under either section 6-5 or section 102-5 of the ITAA 1997 and, therefore, does not need to be included in your assessable income.

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