Private ruling: Assessability of compensation payment
Published: July 2012
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the lump sum you receive for the commutation of past and future liabilities be included in your assessable income? | A1: No.

Relevant facts and circumstances: You will receive a commuted lump sum payment under section 44(11) of the WRC Act.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2). | Workers Rehabilitation and Compensation Act (1986) (SA) Section 44.

Reasons for decision: Summary: A receipt is assessable income if: · it is income in the ordinary sense of the word (ordinary income); or · it is not ordinary income but through the operation of the legislation it is included in assessable income (statutory income). Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Based on case law, it can be said that ordinary income generally includes receipts that: · are earned · are expected · are relied upon, and · have an element of periodicity, recurrence or regularity. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( FC of T v Dixon (1952) 86 CLR 540). Section 44 of the WRCA provides for weekly compensation payments to be payable to various specified dependents where a worker dies as a result of a compensable disability. Subsection 44(11) of the WRCA provides for a supplementary allowance to be payable in certain circumstances to assist in the care of a child of the deceased worker who is under 18 years of age. Compensation payable under section 44 of the WRCA is for the loss of the deceased's financial support, it is not compensation payable for the loss of your income. Therefore the amount is capital in nature. In your case, you have reached a settlement with the deceased's employer for a lump sum amount in commutation for any entitlement you may have under section 44 of the WRCA. That amount is capital in nature and therefore not assessable as ordinary income under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Statutory income: The receipt of the 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 paragraph 118-37(1)(b) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong, injury or illness suffered by a person or a relative of that person. In your case, the compensation received is for a 'wrong, injury or illness' you have suffered, being the death of a worker on whom you were dependent. Therefore, any capital gain or capital loss arising from the CGT event is disregarded under paragraph 118-37(1)(b) of the ITAA 1997 as it relates wholly to compensating you for a personal wrong, injury or illness. Accordingly, the lump sum amount of compensation received will not be included in your assessable income.

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