Private ruling: Assessability of your lump sum compensation payment
Date of advice: 29 November 2017
Published: April 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the compensation payment you received for injuries, travel expenses and treatment expenses assessable income? | A1: No. | Q3: Is the compensation payment you received for loss of earnings assessable income? | A2: Yes.


Relevant legislative provisions: Section 6-5 of the ITAA 1997 | Section 118-37 of the ITAA 1997

Reasons for decision: Summary: 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. | Detailed Reasoning - Loss of earnings: The compensation being offered to you for loss of earnings is to replace income that would have been earned, expected, relied upon and would have had an element of periodicity, recurrence or regularity. It has been held in court that payments paid to replace past income are considered to be assessable. Taxation Determination TD 93/58 deals with the circumstances under which receipts from a lump sum compensation/settlement payment i s assessable. A receipt is assessable: a) if the payment is compensation for loss of income only b) to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. In your case, the element of the compensation payment that refers to the loss of past earnings is considered to be income and therefore assessable. | Detailed Reasoning - Injuries, travel expenses and treatment expenses: The component of the compensation payment you received for injuries sustained, travel expenses and treatment expenses 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 this amount is considered capital. | 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.

Question 2: Will any capital gain arising from the compensation payment you received for injuries, travel expenses and treatment expenses amount be disregarded?