Private ruling: compensation
Published: February 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the lump sum payment received assessable income? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Paragraph 118-37

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 includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the 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: • are earned, • are expected, • are relied upon, and • have an element of periodicity, recurrence or regularity. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). The lump sum you received was not earned 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 and suffering as a result of your illness, rather than from a relationship to personal services performed. Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income. Amounts received in respect of pain and suffering are capital in nature. Capital amounts are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Accordingly, the lump sum payment received by you is not assessable under either section 6-5 or the CGT provisions. No other taxation provision is relevant in your circumstances. Consequently no part of the amount you received is included in your assessable income. Therefore your payment is not included on your tax return.

You were diagnosed with a disease. | Following legal action you were paid compensation for pain and suffering. You also received an amount for loss of expectation of life, medical expenses and legal fees.