Private ruling: Compensation
Date of advice: 31 January 2017
Published: July 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Client name | 1. Is the sum of $xxxx for general damages assessable income under section 6-5 of the Income Tax Assessment Act 1997 ? | No | 2. Is any capital gain arising from the general damages payment disregarded under section 118-37 of the Income Tax Assessment Act 1997 ? | Yes

Relevant facts and circumstances: A payment of $xxxx is being offered to you for personal general damages relating to your former employer. This payment will be in full and final settlement of all claims.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 paragraph 118-37(1) (a)

Reasons for decision: Detailed Reasoning - Ordinary Income: Section 6-5 of the Income Tax Assessment Act 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 ● have an element of periodicity, recurrence or regularity. In your case, the payment will be made for general damages. The amount paid is not income from rendering personal services, income from property or income from carrying on a business. 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 resulting from the alleged hurt, and general damages rather than from a relationship to personal services performed. A compensation amount generally bears the character of that which it is designed to replace. If the compensation 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 general damages component of your settlement is not a lump sum payment which substitutes for an income stream or a reimbursement of medical expenses. Accordingly, the lump sum amount for the general damages is a capital receipt and is not ordinary income. Accordingly, the lump sum payment for general damages is not ordinary income and is therefore, not assessable under section 6-5 of the ITAA 1997 | Detailed Reasoning - Capital gains treatment: Receipt of a lump sum payment may give rise to a capital gain. The net capital gain you make is then included in your assessable income under section 102-5 of the ITAA 1997 unless an exemption applies. Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts 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. As the amount you are to receive is not in respect of any underlying asset, the whole of the settlement amount for general damages is treated as capital proceeds from a CGT event (CGT event C2) happening to your right to seek compensation. However, paragraph 118-37(1)(a) 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 or injury you suffer in your occupation. In your case, the Deed will be entered into in settlement of your claims which alleged personal general damages against your employer. The general damages payment followed as a result of the incidents suffered by you. Therefore, the capital gain made from the CGT event happening to your right to seek compensation is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. Therefore the lump sum amount from the general damages payment will not be required to be included in your income tax return.