Taxability Of Damages Arising From Personal Injury Claims

Katia Dias – Candidate Attorney

Do I pay tax on damages?

“Gross Income” is defined by s1(1) of the Income Tax Act (“ITA”) as the total amount, in a year or a period of assessment of a resident, in cash or otherwise that is received by or accrued to or in favour of such a resident excluding receipts or accruals of a capital nature.

All requirements of the gross income definition must be present for the amount to be included in gross income.

In order to determine whether damages paid to a specific individual will form part of his/her gross income, an inquiry into to the nature of the amounts received needs to be conducted. The damages received may either be deemed as capital or revenue in nature; only revenue is included in the above definition and will form part of gross income (and will be subjected to income tax).

There are no formal tests afforded by our law, however, precedent developed by our Courts have indicated certain factors that may be relevant when conducting an enquiry.

In the case of Burmah Steamship v IRC a basic test was developed for cases where the receipt represents compensation, referred to as the “filling the hole” test. The general test, as set out, in the case of Burmah Steamship v IRC, requires an inquiry into whether the compensation received was designed to “fill a hole” in the taxpayer’s assets or profits. Compensation received for personal injury, illness or defamation are paid out with the intention of restoring the person who had suffered harm, to the position they were in before the injury, illness or defamation. Therefore, this form compensation is not to fill a gap but rather purports restoration. This type of damages is therefore not subjected to income tax.

Furthermore, the case of KBI en andere v Hogan demonstrated a typical instance where a taxpayer received a payment from the Road Accident Fund due to a permanent injury that he had suffered in consequence of a motor vehicle accident. Although in this case, the taxpayer exchanged his delictual claim for damages arising out of a motor accident for a contractual obligation in terms of which he would instead be paid monthly annuities; which rendered the compensation to be revenue in nature. Had the taxpayer not exchanged his delictual claim for damages for annuities, the damages claim for personal injury would have rendered compensation of a capital nature.

The Court confirmed that damage to one’s person is damage to their capital asset, and any compensation which you receive in consequence of such damage to your person should be considered capital in nature.

Essentially, damages due to personal injury in terms of delict, remain capital in nature and the monies received will notform part of one’s gross income and will therefore not be subjected to income tax.

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