Private ruling: Compensation payment
Published: November 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Does the lump sum payment constitute assessable income? | A1: No




Facts: You suffered an injury in the course of your employment. | As a result you became entitled to receive a payment under Section 98C/E of the Accident Compensation Act 1985 (ACA). | The state WorkCover Authority has calculated your entitlement on the basis of the determination of your impairment, and has determined that you are entitled to compensation non-economic loss. | You received the payment in the relevant financial year. | Reasons for our decision: 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 an income year. | 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: | • have an element of periodicity, recurrence or regularity. | The lump sum payment offered to you by the state WorkCover Authority is not earned by you as it does not directly relate to services performed. Rather the lump sum relates to the personal injury. The payment is also a one-off payment and does not have an element of recurrence or periodicity. | Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the ACA rather from a relationship with personal services performed. As such the lump sum payment is not ordinary income and is therefore not assessable income under subsection 6-5(2) of the ITAA 1997. | Capital gains tax consequences: Section 6-10 of the ITAA 1997 provides that your assessable income also includes amounts known as statutory income. Statutory income is included in your assessable income by specific provisions of the ITAA 1997, and includes capital gains tax (CGT). If an amount is not ordinary income or statutory income it is not assessable income (subsection 6-15(1) of the ITAA 1997). | Taxation Ruling TR 95/35 indicates that a 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)(a) 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 wrong, injury or illness suffered in their occupation. | In summary, the lump sum payment received by you will not be assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. The lump sum payment is also disregarded from CGT by the operation of paragraph 118-37(1)(a) of the ITAA 1997 and as a result does not constitute statutory income.