IR has released a draft interpretation statement PUB00246: Income tax — Treatment of lump sum settlement payments for consultation.
It sets out how the Commissioner will treat a lump sum payment received under a settlement agreement for claims that (if successful) would have resulted in receipts of both a capital and revenue nature.
Broadly whether a settlement payment is taxable depends on what it is paid for; what was given up in return for the payment; and its nature in the hands of the recipient.
Where a single undissected sum is received, it should be apportioned between its capital and revenue elements where possible. Any apportionment must be made on an objective basis. The starting point for determining an appropriate apportionment will be the settlement agreement and any related documents.
Where necessary, the circumstances surrounding the agreement and other relevant evidence should be considered. The onus of proof is on the taxpayer to show the apportionment is appropriate.
In the rare circumstance where the payment cannot be appropriately apportioned, the amount must be considered as a whole. Generally, where an amount cannot be apportioned, the full amount will be income unless the income part is so ancillary or incidental it can be ignored.”
The deadline date for comment in response to this is on 19 January 2016.