Private ruling: Compensation payment
Published: February 2013
Date scheme commenced: 1 July 2012

Ruling: Question and answer: | Is the compensation payment assessable income for tax purposes? | No. | This ruling applies for the following periods | Year ended 30 June 2013

Relevant facts and circumstances: You will be receiving a lump sum compensation payment for a personal wrong.

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

Reasons for decision: Summary: Is the lump sum compensation payment assessable as ordinary income? Section 6-5 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. 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, the payment you are entitled to receive is compensation for suffering caused by a personal wrong. The payment does not have the characteristics of ordinary income and was not earned by you and did not relate to services performed. The payment is also a one-off payment and 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 suffering resulting from a personal wrong. Therefore the lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Is the lump sum compensation payment assessable as a capital gain?: 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. 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 payments or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness. In your case, the payment will be made to you as a result of a personal wrong, and as such the payment will be exempt from capital gains tax under paragraph 118-37(1)(b) of the ITAA 1997. | Detailed Reasoning - Conclusion: As the lump sum compensation payment is not ordinary income or a capital gain, it is not assessable income and does not need to be included in your income tax return.