Private ruling: Assessability of your lump sum compensation payments
Date of advice: 17 August 2017
Published: November 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the lump sum payment you received pursuant to section 33 and 54(1)(a) of the Return to Work Act 2014 (a relevant State) (RWA) assessable as either ordinary income or as a capital gain? | A1: No. | Q2: Is the lump sum payment you received pursuant to section 56 of the RWA assessable as either ordinary income or as a capital gain? | A2: No. | Q3: Is the lump sum payment you received pursuant to section 58 of the RWA assessable as either ordinary income or as a capital gain? | A3: No.

Relevant facts and circumstances: You sustained permanent impairment said to have arisen from your employment. You made a claim for compensation pursuant to the RWA, which was rejected and went to the relevant State Employment Tribunal. The proceedings determined that you will receive a lump sum compensation payment pursuant to sections 33, 54, 56 and 58 of the RWA . In accordance with Part 2 Division 5 section 22 of the RWA you have been assessed as having a percentage of whole person impairment (WPI). You will also receive a lump sum compensation payment pursuant to section 53 of the RWA. As per verbal discussion with your tax agent, Taxation Determination TD 2016/18 will apply to this part of your lump sum payment and is assessable.

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 15-30 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subparagraph 118 37(1)(a)(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 33 and 54 of the RWA entitles a worker to compensation for medical expenses in relation to a work injury suffered by a worker. Section 56 of the RWA entitles a worker to compensation for economic loss of future earning capacity. Such amounts do not have the character of ordinary income. They are based on a sum prescribed by statute which bears no relationship to the employee's current or former earnings. In contrast, the calculation of weekly payments according to the worker's past and current earnings indicates that they reflect an actual loss of income as opposed to a loss of income earning capacity. Section 58 of the RWA entitles a worker to compensation for non-economic loss by way of a lump sum. The amount received is calculated as a proportion of the prescribed sum for the degree of WPI caused by the work injury. Non-economic loss is defined in the RWA as: ● pain and suffering ● loss of amenities of life ● loss of expectation of life ● disfigurement ● any other loss or detriment of non-economic nature. In your case, your lump sum payments are bearing none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity, and nor is it paid to compensate for loss of income. Therefore, the lump sums are capital in nature and will not be assessable as ordinary income. | Detailed Reasoning - Statutory income: The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under 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 payment has 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/injuries. 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 payment will not be assessable as statutory income. As the lump sum payments pursuant to sections 33, 54 (1)(a), 56 and 58 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.