Issue
Is a lump sum payment received by a taxpayer for permanent injury, assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or as statutory income under section 6-10 of the ITAA 1997?
Decision
No. A lump sum payment received by the taxpayer for permanent injury is not assessable under section 6-5 of the ITAA 1997 as it is not ordinary income and it is not statutory income under section 6-10 of the ITAA 1997 as it is disregarded from Capital Gains Tax (CGT) by the operation of paragraph 118-37(1)(a) of the ITAA 1997.
Facts
The taxpayer was injured at work.
The taxpayer received a lump sum payment in respect of permanent impairment from injury.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has generally been held to include 3 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.
The lump sum payment is not earned by the taxpayer as it does not directly relate to services performed. Rather the lump sum relates to the loss of physical abilities. The payment is also a one-off payment and thus 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 investment in insurance, rather than from a relationship with personal services performed. Thus, 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.
Taxation Ruling TR 95/35 indicates that settlement of a personal injuries claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the losses arising from the injury suffered.
The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(a) of the ITAA 1997 disregards payments or receipts for the purposes of CGT where the amount relates to compensation or damages a taxpayer received for any wrong, injury or illness a taxpayer suffers in their occupation.
The lump sum payment received by the taxpayer for permanent injury is not assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. The lump sum payment is also disregarded from CGT by the operation of paragraph 118-37(1)(a) of the ITAA 1997. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Note: the exception listed in paragraph 118-37(1)(a) of the ITAA 1997 is not an exemption as provided for in section 6-20 of the ITAA 1997.