Private ruling: Assessability of compensation payment
Date of advice: 1 February 2016
Published: March 2016
Ruling period: Year ended 30 June 2016.
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you required to treat the receipt of lump sum insurance proceeds arising from a claim under the specific injury benefit outlined in clause 6 of the Policy Schedule as assessable income? | A1: No.

Relevant facts and circumstances: You are a partner in a partnership. The partnership has taken out a policy on behalf of the partner group. All partners are automatically covered by the relevant insurance policies, including the policy, on joining and cover ceases automatically on departure from the firm. The Policy Schedule covers a number of different medical events and provides for different types of payments, e.g., salary continuance or critical illness, depending on the nature of the event and the other relevant circumstances. You are a resident of Australia for tax purposes. You suffered a medical condition as a result of an accident. This medical condition is a specific injury qualifying under Clause (6) of the Policy Schedule and specifically listed at a clause 3.6 of the Policy. The payment is a lump sum benefit paid from the date the insured member suffers the medical condition. You received a lump sum payment in the year of income ended 30 June 20XX as a result of your specific injury.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (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 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: • are earned • are expected • are relied upon, and • have an element of periodicity, recurrence or regularity. You were involved in an accident and as a result suffered injuries. You have now received a lump sum payment for pain and suffering, future medical treatments. The payment was not earned by you 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 pain, suffering and medical treatment required resulting from the injury, rather than from a relationship to personal services performed. Accordingly, the lump sum payment is not ordinary income and is therefore, not assessable under section 6-5 of the ITAA 1997.