Private ruling: Interim payments - motor vehicle accident
Date of advice: 24 December 2024
Published: 17 February 2025
Ruling period: Year ended 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the payments you receive in accordance with section 3.8 of the Motor Accident Injuries Act 2017 (NSW) included in your assessable income? | A1: No.

Relevant facts and circumstances: You were involved in a motor vehicle accident several years ago. As a result of that accident, you sustained injuries. You made a compulsory third party (CTP) insurance claim with the insurer more than 78 weeks following the accident. Prior to the accident, you were employed on a full-time basis and currently have no capacity to return to work in suitable employment. Your medical practitioner provided a certificate of fitness advising you have no capacity to work. You were paid weekly amounts by the insurer. This amount is equivalent to a percentage of your pre-accident earning capacity. Previously, the amounts were paid fortnightly but are now paid weekly. Section 3.8 of the Motor Accident Injuries Act 2017 (NSW) (the Act) outlines that your entitlement to ongoing statutory benefits continuing after 78 weeks is to be at the rate of: (a) in the case of total loss of earning capacity-80% of your pre-accident earning capacity or; (b) in the case of partial loss of earning capacity-85%, of the difference between the person's pre-accident earning capacity and the person's post-accident earning capacity (if any) or post-accident earnings, whichever is the greater, after the second entitlement period. Your pre-accident earning capacity was assessed as being a particular amount per week and your post-accident earning capacity was assessed as $0 per week. As you have experienced a total loss of earning capacity, payments are made under paragraph (a) of section 3.8 of the Act.

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 6-15 | Income Tax Assessment Act 1997 section 118-137

Reasons for decision: Summary: In your case, it is accepted that the payments you receive are capital in nature and not assessable as ordinary income. Any capital gains tax (CGT) consequences are disregarded in accordance with subparagraph 118-137 (a)(ii) of the ITAA 1997 as the payments relate to a wrong, injury or illness you suffered personally. | Detailed Reasoning - Detailed reasoning: Whether a receipt is assessable income in the hands of the recipient depends upon whether it is income or capital. It is the character of the receipt in the hands of the recipient that must be determined and for income tax purposes, a compensation amount generally bears the character of that which it intends to replace. Division 3.3 of the Act deals with weekly payments of statutory benefits to injured persons. It outlines three entitlement periods for which statutory payments may be made: • Section 3.6 deals with weekly payments during the first entitlement period (first 13 weeks after motor accident); • Section 3.7 deals with weekly payments during the second entitlement period (weeks 14-78 after motor accident), and • Section 3.8 deals with weekly payments after the second entitlement period (after week 78) Both sections 3.6 and 3.7 confer an entitlement to payments of statutory benefits to an "earner who is injured as a result of a motor accident and suffers a total or partial loss of earnings" (emphasis added). The wording of sections 3.6 and 3.7 is in contrast with the wording of section 3.8 which is reproduced below. 3.8 Weekly payments after second entitlement period (after week 78) A person who is injured as a result of a motor accident and suffers a total or partial loss of earning capacity as a result of the injury is entitled to weekly payments of statutory benefits ... Where the damages or compensation are received pursuant to a statutory entitlement, such as under the Act, the question of what the entitlement is for is generally answered by looking to the purpose for which entitlement arises. The purpose of a statutory payment is of powerful, though not conclusive, assistance to the determination of the character of the payment. The wording of sections 3.6 and 3.7 " total or partial loss of earnings" clearly indicate that the statutory payments made under those provisions are for loss of earnings and are in substitute for income. The wording of sections 3.6 and 3.7 are in contrast with those of section 3.8 which refer to the entitlement to statutory compensation being in relation to a " total or partial loss of earning capacity". Such payments have been held to have not been liable to income tax as they are made in relation to the loss or diminution of a capital asset being one's earning capacity. This view is expressed by the Commissioner in Income Tax Ruling "IT 2193: Income tax: compensation for loss of earning capacity" where the Commissioner considers the Federal Court judgment in FCT v. Slaven 84 ATC 4077 and states at paragraph 9: "... the decision will extend to payments made by other compensation boards where the payments made are in the nature of compensation for deprivation or impairment of earning capacity." Having determined that the amount received under section 3.8 is for a capital amount, there is a requirement to determine whether there are any distinguishing characteristics, such as periodicity, regularity or recurrence, circumstances and manner of the payments that may change what would otherwise be capital payments into income. Periodicity is a characteristic that is frequently identified by the courts as a key factor in determining whether an amount has the character of income according to ordinary concepts. Although income will usually have an element of periodicity, recurrence or regularity, this element is not always essential for an amount to be income. A single receipt or the proceeds of an isolated transaction, even if received as a lump sum, may well be income. The judgments of Dixon CJ and Williams J in FC of T v . Dixon [1952] HCA 65 explain that it was not only the periodicity of the receipt that was relevant in determining that the receipt was a receipt of income but also the fact that the taxpayer depended on the receipt for his day to day living expenses. Additionally, in Fullagar J's judgment, the periodicity test was linked with a further test, the substitution test, meaning that a receipt paid in substitution for another takes the character of the substituted receipt. In Slaven , the compensation paid to the taxpayer was expressed to be for deprivation or impairment of earning capacity and was calculated having regard to loss of earnings already incurred, likely loss of future earnings and other relevant matters such as the nature of the injury. The compensation was paid to the taxpayer in five irregular instalments which fairly closely approximated her net pre-accident earnings. The Full Federal Court held that the payments were capital in nature and were instalments of an ascertainable lump sum for the loss of earning capacity. In Federal Commissioner of Taxation v. Inkster 89 ATC 5154, Lee J (with whom Gummow J agreed), in considering the assessability of certain amounts payable under workers' compensation legislation, stated at ATC 5159 that: "periodicity of payment alone may not be determinative of the question of whether the payments are in the nature of income but such a circumstance is important and additional circumstances may make it clear that the periodical payments do have such character." In that case the Court decided that the amounts received were of an income nature because although not in substitution of lost wages, they were intended to be a weekly supplement and that in addition, each payment was intended to operate "as a weekly amelioration of any realisation of [the taxpayer's] impaired capacity to earn a weekly income". Therefore the receipt of regular periodical payments was able to give what otherwise may have been a capital receipt the character of income. The payment of any entitlement to statutory benefits under Division 3.3 of the Act is generally made on a fortnightly basis in accordance with section 3.23 but may be varied by agreement between the insurer and the injured person. In addition, periodicity of payments under the Act reflects the evident purpose of the Act (as set out in section 1.3) with respect to accessing early treatment, financial support and claims resolution for the injured person. Accordingly, regular payments under section 3.8 is not determinative of the tax character of the payments received by the injured person. The calculation of the quantum of such payments is made with reference to an injured person's "post-accident earning capacity" which is defined in Schedule 1 of the Act. In respect of sections 3.6 and 3.7, the quantum of weekly payments is calculated by reference to the person's pre-accident weekly earnings and post-accident earning capacity and implies a substitution for loss of income for those entitlement periods. By contrast, section 3.8 calculates the quantum of weekly payments by reference to the person's pre-accident earning capacity and post-accident earning capacity and implies compensation for deprivation or impairment of earning capacity. This is further supported by continuation of statutory benefits beyond the maximum weekly payments period (104 weeks) where there is a damages claim pending or the injured person has been assessed with a degree of permanent impairment. Further, section 3.16 provides that an insurer can make a decision about the pre-accident and post-accident earnings capacity for an injured person, where, for example, the injured person and the insurer disagree as to the extent of earning capacity which is subjective. This indicates the process the insurer must engage in is one of valuation and not one of assessing lost earnings and suggests a capital receipt by the injured person. Depending upon the entitlement period referred to, "post-accident earning capacity" has varying definitions that distinguish between what a person was earning in their employment immediately prior to the accident for the first and second entitlement periods and an injured person's capacity to earn in any employment reasonably available to the person for any period after the second entitlement period. Both of the definitions of "post-accident earning capacity" is referenced to a person's "fitness for work" which is variously defined in Schedule 1 of the Act. A person's "fitness for work" during the first and second entitlement periods is determined having regard to the nature of the injury and the likely process of recovery, treatment and rehabilitation needs, any earnings of the person in any employment after the motor accident and any medical certificate provided regarding the person's fitness for work. These criteria generally relate to loss of earnings or income. A person's fitness for work after the second entitlement period is determined having regard to the nature of the injury and the likely process of recovery, the treatment provided and rehabilitation undertaken, any medical certificate as to fitness for work and considers additional criteria being, the potential for further treatment and rehabilitation, the person's training, skills and experience and age. These additional criteria are generally relevant to assessing the person's post-accident earning capacity and also relevant to assessing the person's degree of permanent impairment. The statute provides for different means of assessment for total or partial loss of earnings and total or partial loss of earning capacity. This is demonstrated by: • the distinction between statutory benefits for the first two entitlement periods and those payable after the second entitlement period; • the additional criteria applicable for 'fitness for work' after the second entitlement period; • the continuation of payments past the maximum weekly payment period in the case of pending damages litigation and assessed permanent impairment; • the valuation exercise in assessing earning capacity for both pre-accident and post-accident earnings capacity which involve subjective elements. Noting that periodicity of payments is not determinative, these distinct treatments reflect the underlying differing character of the statutory benefits under sections 3.6 and 3.7 versus section 3.8 of the Act, being that between income ("loss of earnings") and capital ("loss of earning capacity"). Considering the purpose and character of the statutory payments under section 3.8 of the Act and the method of their calculation it is concluded that they are not of an income character. Receipt of capital payments may give rise to capital gains (statutory income). However, subparagraph 118-37(1)(a)(ii) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness. That CGT exemption applies in this case.