Private ruling: Compensation payment
Published: December 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and answers | Is the compensation payment you received assessable income? | No. | Will any capital gain or loss resulting from your compensation be ignored? | Yes.

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 were involved in a motor vehicle accident in 2013. In 2014 you received a compensation payment of $X. The compensation payment was apportioned as follows: Pain and suffering $ Loss of chance $ Loss of future superannuation $ Voluntary services $ Reimbursement of police reports $ Disbursements paid to lawyer $ Legal costs $ Relevant legislation provisions: Income Tax Assessment Act 1997 Section 6-5. Income Tax Assessment Act 1997 Section 6-10. Income Tax Assessment Act 1997 Section 10-5. Income Tax Assessment Act 1997 Section 15-30. Income Tax Assessment Act 1997 Section 102-5. Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).


Reasons for decision: Summary: Section 6-5 of the 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 3 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, the lump sum you received was not earned 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 alleged abuse and neglect you suffered, 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 no component of the amount you received was to compensate for loss of income. Accordingly, the lump sum payment is not ordinary income and, 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. 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 the alleged abuse 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 alleged abuse and neglect suffered as a child, is not assessable under either section 6-5 or section 102-5 of the ITAA 1997 and does not need to be included in your assessable income.