Private ruling: Compensation - work related - lump sum payments
Published: February 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the payments you received as a lump sum included in your assessable income? | A1: No

Relevant facts and circumstances: You are an employee. Your employer has taken out a Salary Continuance Insurance Plan (SCI) through an insurance provider. This policy covers all permanent employees of your employer. As an employee of your employer you are covered by this policy. You were diagnosed with an illness in early 20XX. You ceased working from early 20XX. Under the SCI plan you have received monthly payments of $XXXX per month since mid 20XX as replacement of income. You continue to receive these payments to date. Under the SCI plan you have also received two lump sum payments: • Benefit A - $XXXX • Benefit B - $XXXX The Benefit A has been paid as your illness falls within one of the events listed within the policy. The Benefit A is paid in addition to any other benefit insured under the policy and is a once only payment. The Benefit B is paid when the insured member suffers an injury or sickness and as a consequence is totally disabled and requires nursing care or hospitalisation during the waiting period.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-25(2) | Income Tax Assessment Act 1997 paragraph 108-5(1)(b) | Income Tax Assessment Act 1997 paragraph 118-37(1)(b)

Reasons for decision: Detailed Reasoning - Ordinary income: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include three categories - 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, expected, relied upon, and have an element of periodicity, recurrence or regularity. Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. You did not earn the lump sum payment as it does not directly relate to services performed. The payment is a one-off payment and does not have any element of recurrence or regularity. Thus, the lump sum payments for the Benefit A and Benefit B are not ordinary income and are not assessable under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Capital gains: Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a capital gains tax (CGT) asset. A taxpayer's right to seek compensation is therefore classified as an intangible CGT asset. Section 104-25 of the ITAA 1997 discusses CGT event C2 which refers to cancellation, surrender and similar endings. CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being surrendered or forfeited. Subsection 104-25(2) of the ITAA 1997 states that the time of the event is: (a) when you enter into the contract which results in the asset ending; or (b) if there is no contract when the asset ends. Taxation Ruling TR 95/35 indicates that settlement of a personal injury claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the losses arising from the injury suffered. The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards payments or receipts where the amount relates to compensation or damages a person receives for any wrong, injury or illness that they suffer. As such, the lump sum payments received by you in the form of the Benefit A and Benefit B are not assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. Further, the lump sum payments can be disregarded under paragraph 118-37(1)(b) of the ITAA 1997 as the compensation related to an illness. Therefore, the lump sum payments you received from the insurance provider will not be included in your assessable income.