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

Ruling: Q1: Will the lump sum compensation amount you received be included in your assessable income? | A1: No | Q2: Will any capital gain arising from the lump sum compensation amount be disregarded? | A2: Yes

Relevant facts and circumstances: You were the victim of a violent crime. You applied for compensation under a statutory authority. You were awarded compensation of $x.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 118-37

Reasons for decision: Detailed Reasoning - Income: Subsection 6-5(2) 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. Ordinary income has been held to include income from providing 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 or relied upon • have an element of periodicity, recurrence or regularity • replace income. A compensation amount normally assumes the nature of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount, then it will be regarded as a capital receipt and not ordinary income. The compensation payment you received for injuries sustained was not earned as it does not relate to services performed. The payment would also be a one off payment, and thus it would not have an element of recurrence or regularity. Although it can be said to be expected, and perhaps relied upon, this expectation arises from the damage and suffering, rather than from a relationship to personal services performed. Therefore the amount you received for injuries sustained will not be considered as income and will not be assessable. | Detailed Reasoning - Capital Gains: Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gains tax event 'relating directly .... to compensation or damages you receive for any wrong, injury or illness you suffer personally.' The lump sum amount paid to you meets this description. Section 118-37 of the ITAA 1997 will apply to the lump sum amount so that any capital gain or capital loss you make will be disregarded.