Private ruling: Lump sum compensation payment
Date of advice: 9 July 2018
Published: September 2018
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the portion of the lump sum payment you received pursuant to section 53 of the Return to Work Act 2014 (Relevant State) (RWA) assessable as ordinary income? | A1: Yes. | Q2: Is the portion of the lump sum payment you received pursuant to section 54 of the RWA assessable as either ordinary income or as a capital gain? | A2: No.

Relevant facts and circumstances: When you were an employee of the State Government, you sustained a work injury. You made an agreement with your employer under Section 54 of the Return to Work Act 2014 (Relevant State) (“the Act”), to make weekly payments to you of income maintenance pursuant to part 4 Division 4 of the Act, and medical expenses payments of the kind referred to in section 33 of the Act. The liability to make weekly payments and to make payments under section 33 of the Act is to be made with a capital payment in respect of weekly payments and in respect of payments under Section 33 of the Act. You have also provided a copy of the redemption agreement. The agreement states that you agree to resign from your employment, both parties waiving any rights as to notice.

Relevant legislative provisions: Income Tax Assessment Act section 6-5 | Income Tax Assessment Act section 6-10 | Income Tax Assessment Act 1997 Section 15-30 | Income Tax Assessment Act section 104-25 | Income Tax Assessment Act 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. A lump sum payment representing redemption of future weekly payment is also regarded as assessable income. The fact that the payment is received in one lump sum does not change its revenue character. This is consistent with the approach taken by the Commissioner in Taxation Determination TD 93/3 Income tax: is a payment, being a partial commutation of weekly compensation payments, assessable income? As outlined in paragraph 4 of TD 93/3, such a commutation would result in the lump sum remaining assessable, as its effect was simply to pay in advance the future weekly payments. In your case, you have received a dissected lump sum, with the payment being pursuant to several sections of the Act. Therefore, in order to determine the taxation treatment of your lump sum payment the nature of the individual components must be examined. | Detailed Reasoning - Section 53 of the Act: Taxation Determination TD 2016/18 Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (Relevant State) assessable income of the worker, states that a payment made under section 53 of the RWA is ordinary income of the worker and is therefore assessable under section 6-5 of the ITAA 1997 in the income year in which it is received. Therefore, you will need to include in your income tax return the portion of your lump sum that relates to the redemption of your entitlement to future weekly payments under section 53 of the Act. | Detailed Reasoning - Section 54 of the Act: You have received a lump sum redemption amount pursuant to section 54 of the Act 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 Act. 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. | 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 under sections 54 of the Act 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 sections 54 of the Act 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 are satisfied the payment is excluded from being an Eligible Termination Payment.