Private ruling: Income compensation
Date of advice: 6 January 2016
Published: March 2016
Ruling period: 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are the amounts paid to you pursuant to the relevant workers compensation legislation assessable income? | A1: Yes.

Relevant facts and circumstances: On the XX Month 20XX you sustained an injury at work. Your claim for workers compensation was dealt with by the relevant Workers Compensation Commission. You were on unable to work due to the injury from the beginning of 20XY until the end of 20XY, during this period you had taken sick leave until Month 20XY. The agreed lump sum payment was a reduced settlement to your annual income. The Commission issued a determination in 2015 which outlined the following: 1. Respondent is to pay you weekly payments of compensation of as follows: a. $X from XX Month 20 XY to XX Month 20 XY being 95 per cent of your pre-injury average weekly earnings, and b. $X from XX Month 20 XY to XX Month 20XY being 80 per cent of your pre-injury average weekly earnings 2. Otherwise and thereafter an award for the respondent in respect of your claim for weekly payments of compensation. 3. Respondent is to pay your medical or related treatment expenses up to $X upon production of accounts, receipts and Medicare Australia notice of charge. You received the $X payment from Insurance X, less PAYG withholding, in two instalments during the 20XY - XY income year.

Relevant legislative provisions: Section 6-5 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). The courts have identified a number of factors which indicate whether an amount has the character of income according to ordinary concepts. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity ( FCT v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82). One or more of the following characteristics will combine with periodicity to give an amount an income nature: • it is made in substitution of income; • it is made to provide financial support, for example, as an income supplement; or • it is received in circumstances where the recipient has an expectation of receiving the payment on a regular basis so that the recipient is able to depend upon the payment for his or her regular expenditure. Payments for rendering personal services, such as salary or wages, are ordinary income and are included in assessable income under section 6-5 of the ITAA 1997. An amount paid to compensate for loss generally acquires the character of that for which it is substituted. Compensation payments, such as workers compensation, which substitute income, have been held by the courts to be income under ordinary concepts ( FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142). Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable. In your case the payment made to you by Insurance X, even though being a lump sum payment, was compensation intended to replace the wages you would have normally earned. The relevant workers compensation legislation provides an entitlement to weekly compensation payments. The information supplied in the determination by Workers Compensation Commission sets out how the lump sum payment was dissected. It shows that the payment was in relation to your entitlement to compensation under the relevant workers compensation legislation which makes the payment identifiable and quantifiable as income. Therefore, the lump sum amount you received is assessable under section 6-5 of the ITAA 1997.