Private ruling: Lump sum compensation payment
Date of advice: 23 August 2017
Published: December 2017
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

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

Relevant facts and circumstances: You suffered from multiple work injuries over an extended period of time. You made a claim for compensation pursuant to the RWA, which was accepted. You lodged an application for review in the Relevant State Employment Tribunal. The application for the review was resolved under a Standard Form of Order. You were found to be entitled to compensation for non-economic loss pursuant to section 58 of the RWA. Subsection 58(4) of the RWA states that the lump sum will be an amount that represents a portion of the prescribed sum calculated in accordance with the regulations. Non-economic loss is defined in the RWA as: ● pain and suffering ● loss of amenities of life ● loss of expectation of life ● disfigurement ● any other loss or detriment of non-economic nature. You also entered into a separate agreement for the redemption of your entitlement to future weekly payments and future medial and like expenses pursuant to sections 53 and 54 of the RWA. You have received the lump sum payment.

Relevant legislative provisions: Income Tax Assessment Act section 6-5 | Income Tax Assessment Act section 6-10 | 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. In your case, you have received a dissected lump sum, with the payment being pursuant to several sections of the RWA. Therefore, in order to determine the taxation treatment of your lump sum payment the nature of the individual components must be examined. Section 53 of the RWA 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, 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 the portion of your lump sum that relates to the redemption of your entitlement to future weekly payments under section 53 of the RWA in your income tax return as assessable income. Section 54 of the RWA You have received a lump sum redemption amount pursuant to section 54 of the RWA 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 RWA. 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. Section 58 of the RWA Section 58 of the RWA entitles a worker to compensation for non-economic loss by way of a lump sum. The amount received is calculated as a proportion of the prescribed sum for the degree of WPI caused by the work injury. It is a one-off lump sum payment bearing none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity, and nor is it paid to compensate for loss of income. Therefore, the payment is capital in nature and 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 payments under sections 54 and 58 of the RWA 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 and 58 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.