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Personal Injury Compensation payment

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Newbie

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My wife will receive a personal injury payment this year.

The law firm uses the terminology “past economic loss” for part of the compensation payment income. Part of her claim is for lost income due to time away from work. 

In the ATO Legal Database, the terminology used is non-economic loss and is defined as “pain & suffering, loss of amenities of life, loss of expectation of life, disfigurement and any other loss or detriment of non-economic nature”. Payments for those are not assessable as ordinary income.

Would this also apply for any income received for “past economic loss”. 

Thanks

RobertD

 

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Devotee

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Hi @RobertD 

 

Compensation and injury payments are usually only assessable income if they're paid under an income protection, sickness or accident insurance policy or workers compensation scheme. Otherwise, if you've made a personal injury claim and agree to a settlement or a court orders compensation to be paid to you then these payments are generally not assessable income, but it really depends on your specific circumstances.

 

To really get a definitive answer you'll need to contact the ATO, but this is something that's beyond the general call centre so if you do want to get in touch, then I'd suggest requesting an early engagement discussion. This way specialist ATO staff can let you know if they can answer your question directly or whether an official private ruling application is required in your circumstances.

 

Generally speaking here are some of the most applicable principles:

  • assessable income includes "ordinary income" derived directly or indirectly from all sources
  • a compensation payment generally "acquires the character of that for which it is substituted" so a compensation payment which directly substitutes for an income payment is usually ordinary income
    • e.g. workers compo payments, which are regular period payments of compensation in place of specific income payments, where the compo payment is often the exact amount of income that would have otherwise been paid by the employer
  • if a compensation payment is for the loss of a capital asset  then it will be regarded as a capital receipt and not ordinary income
    • e.g. the capital asset could be giving up the right to seek compensation in the future or compensation for loss of earning "capacity" (i.e. as opposed to loss of a specific amount of actual "earnings")
  • capital receipts can be assessable under the CGT regime, but capital gains or losses relating directly to "compensation or damages you receive for any wrong, injury or illness you suffer personally" are specifically excluded

*Edit: I tried to post a few links to some edited private rulings on whether personal injury compensation is assessble income (edited private rulings are actual ATO private rulings that have had confidential information removed so they can be made available publicly)... but unfortunately the way this forum is configured means the link URL gets edited and the string of numbers in it is replaced with **TFN removed**4567 so the links won't work.

 

You can find these edited private rulings on in the ATO legal database by doing an advanced search and choosing 'Edited private advice' in the 'Refine search by' drop-down menu. I just did a search on the exact phrase 'personal injury' with the additional word 'compensation' and there were 165 results.

 

JF

 

This is my personal view; I’m an ATO employee who chooses to help out here in my own time.

 

1 REPLY 1
Highlighted

Most helpful response

ATO Certified Response

Devotee

Replies 0

Hi @RobertD 

 

Compensation and injury payments are usually only assessable income if they're paid under an income protection, sickness or accident insurance policy or workers compensation scheme. Otherwise, if you've made a personal injury claim and agree to a settlement or a court orders compensation to be paid to you then these payments are generally not assessable income, but it really depends on your specific circumstances.

 

To really get a definitive answer you'll need to contact the ATO, but this is something that's beyond the general call centre so if you do want to get in touch, then I'd suggest requesting an early engagement discussion. This way specialist ATO staff can let you know if they can answer your question directly or whether an official private ruling application is required in your circumstances.

 

Generally speaking here are some of the most applicable principles:

  • assessable income includes "ordinary income" derived directly or indirectly from all sources
  • a compensation payment generally "acquires the character of that for which it is substituted" so a compensation payment which directly substitutes for an income payment is usually ordinary income
    • e.g. workers compo payments, which are regular period payments of compensation in place of specific income payments, where the compo payment is often the exact amount of income that would have otherwise been paid by the employer
  • if a compensation payment is for the loss of a capital asset  then it will be regarded as a capital receipt and not ordinary income
    • e.g. the capital asset could be giving up the right to seek compensation in the future or compensation for loss of earning "capacity" (i.e. as opposed to loss of a specific amount of actual "earnings")
  • capital receipts can be assessable under the CGT regime, but capital gains or losses relating directly to "compensation or damages you receive for any wrong, injury or illness you suffer personally" are specifically excluded

*Edit: I tried to post a few links to some edited private rulings on whether personal injury compensation is assessble income (edited private rulings are actual ATO private rulings that have had confidential information removed so they can be made available publicly)... but unfortunately the way this forum is configured means the link URL gets edited and the string of numbers in it is replaced with **TFN removed**4567 so the links won't work.

 

You can find these edited private rulings on in the ATO legal database by doing an advanced search and choosing 'Edited private advice' in the 'Refine search by' drop-down menu. I just did a search on the exact phrase 'personal injury' with the additional word 'compensation' and there were 165 results.

 

JF

 

This is my personal view; I’m an ATO employee who chooses to help out here in my own time.