Private ruling: Lump sum compensation payments
Date of advice: 16 September 2025
Published: 3 November 2025
Ruling period: For the income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the lump sum redemption payment you received for liabilities associated with medical services pursuant section 54 of the South Australian Return to Work Act 2014 assessable income? | A1: No. | Q2: Is the lump sum redemption payment you received for liabilities associated with weekly payments pursuant section 53 of the South Australian Return to Work Act 2014 assessable income? | A2: Yes.

Relevant facts and circumstances: You suffered serious injuries while at work and were entitled to income support under your Australian states legislation. The liability to receive weekly payments in respect of that incapacity and liabilities associated with medical services may, by an agreement between the worker and state based Corporation (or a self-insurer), be redeemed by a capital payment to the worker. You entered into settlement negotiations (claim number X) with the Corporation to redeem your entitlement to receive future weekly payments and to receive compensation for medical services and other expenses in accordance with the State Act. The lump sum settlement amount offered by the Corporation under the redemption agreement you signed (the agreement) was for $X. Before signing the agreement you obtained the required professional advice about the consequences of redemption and financial advice about the investment. You also sought advice from a recognised health practitioner about future medical services that you may require, which was in accordance with the Act. You received a lump sum redemption payment of $X to redeem any liability for weekly payments, and to redeem any liability for medical services and other expenses. 10% of the gross amount was withheld and paid to Medicare Australia in accordance with the Health and Other Services (Compensation) Act 1995 . Pay as you go (PAYG) withholding tax was withheld.

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 102-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(i) | South Australian Return to Work Act 2014 section 53 | South Australian Return to Work Act 2014 section 54

Reasons for decision: Summary: Under section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997), the receipt of a lump sum compensation amount may give rise to a net capital gain as statutory income under section 6-10 of the ITAA 1997. Taxation Ruling TR 95/35 Income tax: Capital gains: treatment of compensation receipts explains that the right to seek compensation is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury. A right to seek compensation is an asset for capital gains tax (CGT) purposes. The right to seek compensation is acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged. CGT event C2 relates to the cancellation, surrender or similar endings of a CGT asset (section 104-25 of the ITAA 1997). However, a capital gain or capital loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under the exemption provision contained in 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 redemption payment you received for liabilities associated with medical services is in respect of your workplace injury and the capital gain or capital loss arising from the CGT C2 event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997. The amount is not assessable income. The South Australian Return to Work Act 2014 (RWA 2014) entitles workers suffering a work injury resulting in incapacity for work to weekly payments in respect of that incapacity. Taxation Determination TD 2016/18 Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (SA) assessable income of the worker? expresses the Commissioner's opinion about the way in which a relevant provision applies to redemption payments of this nature. A redemption payment received by a worker under section 53 of the RWA 2014 is considered to be ordinary income of the worker and is assessable under section 6-5 of the ITAA 1997 in the income year in which it is received. The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies 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. A payment under the RWA 2014 is a redemption payment to the extent that: • it is made pursuant to subsection 53(1) of the South Australian RWA 2014. • it is made to redeem a liability to make weekly payments under section 39 or 41, and • it is not an employment termination payment for the purposes of subsection 82-130(1) of the ITAA 1997. The calculation and timing of amounts payable under sections 39 or 41 of the RWA 2014 indicate that the sole purpose of such amounts is to recoup, replace, substitute or compensate for lost income of the worker. In particular, such amounts: • are payable on a weekly (that is recurrent) basis • are directly referable to the average weekly earnings of the worker before the injury • are reduced by the worker's designated (that is actual) weekly earnings • may be reduced in circumstances where the worker would have ceased working overtime, or worked a diminished amount of overtime, if they had continued to work, and • cannot exceed the worker's notional weekly earnings (being their average weekly earnings, subject to certain adjustments). Subsection 49(1) of the RWA 2014 provides that a worker is not entitled to receive, in respect of two or more injuries, weekly payments in excess of the worker's notional weekly earnings. This further confirms that sections 39 and 41 are concerned with replacing actual income lost rather than compensating for a reduction in earning capacity. Thus, while additional injuries may cause a further reduction in earning capacity they would not result in an increase in weekly payments unless they also caused a further loss of income. While weekly payments under sections 39 and 41 of the RWA 2014 are in respect of incapacity, those sections are not concerned with any of the effects of injury save for loss of income. This indicates that the weekly payments themselves have the character of income, whether or not they precisely correspond to the payments the worker would have received if they had not been injured. Weekly payments are 'in respect of incapacity' in the sense that it is worker's incapacity for work which provides the occasion for the replacement of lost income. This approach is confirmed by cases in which amounts described as compensation in respect of incapacity or injury was found to have the character of income. These characteristics serve to distinguish weekly payments under sections 39 and 41 of the RWA 2014 from payments which are only income in nature because of their periodicity or recurrence. The former amounts are income whether or not they are paid weekly. Weekly payments may also be distinguished from payments pursuant to statutory compensation provisions dealing specifically with loss of future earning capacity, such as those in section 56 of the RWA 2014. 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. | Detailed Reasoning - Character of redemption payments: Section 53 of the RWA 2014 addresses the redemption of a liability to make payments under section 39 or 41 by a 'capital payment'. These redemption payments are also considered to be income according to ordinary concepts, since they represent a recoupment, replacement or compensation for income that would otherwise be derived in the form of weekly payments. The character of a redemption payment of this kind was considered in Brackenreg v. Federal Commissioner of Taxation [2003] AATA 824 ( Brackenreg's case ). There the taxpayer received weekly compensation payments from Comcare, which considered their normal weekly earnings. Comcare's liability to make these payments was subsequently redeemed for a lump sum. The Administrative Review Tribunal (formerly known as the Administrative Appeals Tribunal (AAT)) found that the taxpayer's weekly compensation was income, since it was in substitution for and was paid for loss of earnings; and the character of that compensation did not change upon being redeemed by the payment of a lump sum. The payment in Brackenreg's case can be distinguished from the payment considered in Coward v. Federal Commissioner of Taxation [1999] AATA 132 ( Coward's case ). There the taxpayer received weekly compensation payments, based on their previous average weekly earnings. Upon turning 65, the amount of these payments was reduced by reference to an aged-based formula and the taxpayer became entitled to redeem his right to receive further payments for a lump sum. held that although the weekly payments clearly constituted income of the taxpayer, the lump sum was of a capital nature. X took the view that the object of the lump sum was not to compensate the taxpayer for lost earnings, since the taxpayer had reached retirement age. The payment in Coward's case can be contrasted with a redemption payment under section 53. The RWA 2014 only permits weekly payments to a worker who has reached retiring age where the worker remains employed; and upon reaching that age there is no recalculation of the amount of weekly payments. These weekly payments retain their character as a substitution for or replacement of lost earnings. Accordingly, a payment redeeming an entitlement to receive weekly payments also has the character of ordinary income. This characterisation is considered to follow, despite the labelling of redemption payments as 'capital' in the RWA 2014. A State Parliament cannot determine by its own legislation whether a receipt answers the description of income or capital. The tax treatment of the receipt is determined by an assessment of its character in the hands of the recipient, rather than the label given to it. Even so, the purpose of a statutory payment is an important but not conclusive aid to determining whether it constitutes income. The question is what the payment is objectively for, rather than how the parties label it or whether they intended it to be taxed. In this regard, the language in section 53 of the RWA 2014 indicates that the sole purpose of a redemption payment as defined in TD 2016/18 is to redeem a liability to make weekly payments. In this context, the word 'redeem' means to extinguish by paying out, with the worker's consent. It follows, therefore, that the sole purpose of such a payment under section 53 is to extinguish or pay out a liability to pay amounts which recoup, replace or compensate for lost income. As the sole purpose of a redemption amount is to redeem a liability to make weekly payments, it cannot simultaneously be a payment for other things, such as to compensate for a loss of future income earning capacity or a loss of the right to sue for damages. As noted in paragraphs 13 and 21 of TD 2016/18, section 56 of the RWA 2014 concerns compensation for loss of future income earning capacity. A redemption payment under section 53 is concerned with a loss of income arising from incapacity rather than a loss of earning capacity. | Detailed Reasoning - Application to your circumstances: In your case, the redemption payment you received for liabilities associated with receiving future weekly payments under section 53 of the RWA 2014 therefore arose from loss of income due to incapacity rather than a loss of earning capacity. The redemption payment of $X is therefore assessable as ordinary income to be included in your tax return.