Private ruling: Compensation payment
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the portion of the compensation payment you received for loss of wages included in your assessable income? | A1: Yes. | Q2: Is the portion of the compensation payment you received for injuries, travel expenses and treatment expenses included in your assessable income? | A2: No.

Relevant facts and circumstances: You were a victim of a crime. The police represented you in taking the offender to court. You then applied for criminal compensation. You were awarded an amount by the Office of Criminal Injuries Compensation. The payment was broken down into the following components: · Injuries · Loss of earnings · Travel expenses · Treatment expenses

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 15-30 and | Income Tax Assessment Act 1997 section 118-37.

Reasons for decision: Summary: The amount paid to compensate for loss of earnings is assessable as ordinary income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997). The amount paid to compensate for injuries, travel expenses and treatment expenses is not assessable under either section 6-5 or section 6-10 of the ITAA 1997. | Detailed Reasoning - Question 1:: Subsection 6-5(2) of the 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. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation or settlement payment is assessable as ordinary income. TD 93/58 states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable. In your case, you received a compensation payment. You have provided a copy of the compensation payment that specifies an amount paid for loss of earnings. The amount paid to compensate for loss of earnings is assessable as ordinary income under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Question 2: Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 15-30 of the ITAA 1997 operates to include in a taxpayer's assessable income any amount received by way of insurance or indemnity for the loss of an amount if the lost amount would have been included in the taxpayer's assessable income but was not assessable under section 6-5 of the ITAA 1997. The part of the payment that relates to injuries, travel expenses and treatment expenses would not have been included in your assessable income and therefore section 15-30 will have no application. Compensation resulting from personal injury represents a disposal of an asset for capital gains tax (CGT) purposes. 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 for the purposes of CGT where the amount relates to compensation or damages a taxpayer received for any personal wrong, injury or illness. As a result of this crime you were also awarded a compensation amount for injuries, travel expenses and treatment expenses. Paragraph 118-37(1)(b) of the ITAA 1997 will apply so that any capital gain or capital loss that was made will be disregarded for the purposes of CGT. Accordingly, the compensation amount received by you for injuries, travel expenses and treatment expenses is not assessable under either section 6-5 or section 6-10 of the ITAA 1997.

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