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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1013072266500

Date of advice: 17 August 2016

Ruling

Subject: Compensation

Questions and answers

1. Does the Total and Permanent Disablement (TPD) payment form part of your taxable income?

No.

2. Is the total lump sum amount you receive in full and final settlement of your claim under an income protection policy assessable income?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2016

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

You had an income protection policy and a life policy.

You sustained a workplace injury.

You were found to be totally and permanently disabled (TPD).

You were paid an amount gross and all inclusive of any applicable taxes, costs and interest (the settlement sum).

You signed the release agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts. 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.

The TPD payment you received was not earned by you 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 insurance policy, rather than from a relationship to personal services performed.

Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts and therefore assessable and required to be declared as income in a tax return.

Amounts received in respect of personal injury which is not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.

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' is disregarded.

You have received the TPD payment as compensation for injury, but not as direct compensation for loss of income, the TPD payment does not form part of your assessable income and is not required to be declared in your tax return.

The income protection payment is compensation relating to loss of income and is assessable. This payment forms part of your assessable income in the year it is derived and must be included in your tax return.

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