Private ruling: Lump sum compensation payment
Date of advice: 29 March 2018
Published: June 2018
Ruling period: Period ending on 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the lump sum for car accident compensation taxable? | A1: No

Relevant facts and circumstances: You were involved in a motor vehicle accident in State A. At the time of the accident you were not working, however you were planning to go back to work in the future. As a result of the accident you sustained multiple injuries to different parts of your body. As a result of the accident you suffered multiple disabilities. You were represented by lawyers as a result of your motor vehicle accident to make a claim against an insurance company. You participated in an Informal Settlement Conference. Compensation is being paid by X Insurance. A claim was made for past and future medical expenses, past and future domestic assistance and past and future economic loss. There was no portion that was wage loss and no portion specifically that was medical expenses. The insurer arbitrarily assigned an allowance for each head of damage and then made a combined offer. You have no right to any future medical treatment or any other treatment expenses in the future. The Insurance Company paid you a lump sum. The Compensation Lawyers deducted amounts from your nett settlement. After all deductions you will in fact receive a payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 6-15 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 118-37(1)(a)(ii)

Reasons for decision: Summary: Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35) considers the CGT consequences for a person who receives an amount as compensation. The ruling states that a right to seek compensation is an asset for the purposes of the CGT provisions, and that a right to seek compensation is: ● acquired at the time of the compensable wrong or injury, and ● disposed of when it is satisfied, surrendered, released or discharged. TR 95/35 states that compensation received under a policy of insurance relates to a right to seek compensation. Paragraph 118-37(1)(a)(ii) of the ITAA 1997 disregards any capital gain or capital loss made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally. In your case, paragraph 118-37(1)(a)(ii) of the ITAA 1997 applies. This means that the compensation you received for personal injury from a motor vehicle accident is not included in your assessable income by virtue of the CGT provisions. The payment you received is not ordinary income and is not statutory income. Consequently, it is not assessable income (subsection 6-15(1) of the ITAA 1997).