Private ruling: Assessable income
Date of advice: 8 May 2020
Published: June 2020
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Is the lump sum payment you received pursuant to section 54 of the Return to Work Act 2014 (South Australia) (RWA) assessable as either ordinary income or as a capital gain? | A1: No. | Q2: Is the lump sum payment you received as a retraining allowance assessable as ordinary income? | A2: No.

Relevant facts and circumstances: You sustained injuries said to have arisen from your employment. You made a claim for compensation pursuant to the RWA, which was accepted. You will receive a redemption offer of $8000 pursuant to section 33 and paragraph 54(1)(a) of the RWA. You will also receive a retraining allowance in the sum of $5000.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(i) | Income Tax Assessment Act 1997 subsection 82-135(i)

Reasons for decision: Summary: Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary and statutory income (for example, capital gains) derived directly and indirectly from all sources, whether in or out of Australia during the income year. The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies its likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income, as are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts. Section 54 of the RWA You have received a lump sum redemption amount pursuant to section 54 of the RWA and the amount received will be in satisfaction of giving up your rights to future medical and other expenses of the kind referred to in section 33 of the RWA. These are rights of a capital nature and the money you received is to compensate you for the relinquishment of these rights will similarly be of a capital nature. Therefore, the payment will not be assessable as ordinary income. Retraining allowance This portion of the lump sum is not a compensation payment and has not been paid for loss of earnings nor will it recur in the future. The payment is a contribution towards a private expense and is not included in your assessable income. Statutory income The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under capital gains tax (CGT) event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation. In your case, the lump sum payments under section 54 of the RWA have been received as compensation for a 'wrong or injury you have suffered in your occupation', being the loss of body functionality in respect of your workplace injury. Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payments will not be assessable as statutory income. As the lump sum payments pursuant to section 54 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income. Additionally, as the criteria in subsection 82-135(i) of the ITAA 1997 is satisfied the payment is excluded from being an Eligible Termination Payment.