Private ruling: Incapacity for work payments
Date of advice: 29 August 2017
Published: December 2017
Ruling period: Financial year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Question and Answer | Are amounts of compensation you received included in your assessable income? | Yes

Relevant facts and circumstances: You are in receipt of a compensation (incapacity) payment. The payments are compensation for an injury you received. The payment is made as long as you demonstrate an incapacity for work. You will continue to receive fortnightly incapacity payments for as long as you are unable to work, because of the compensable condition.

Relevant legislative provisions: Section 6-5 of the Income Tax Assessment Act 1997 | Section 52-65 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Section 6-5 of the ITAA 1997 states that assessable income consists of both ordinary income and statutory income. However, an amount of ordinary or statutory income will not be assessable income if the amount is made exempt or is otherwise excluded from assessable income. In AAT Case Re Davy and FCT (2003) 53 ATR 1011; [2003] AATA 544, the AAT held that a compensation payment to an ex-member under the Safety, Rehabilitation and Compensation Act 1988 (SRC) for a serious eye injury sustained while he was employed was not exempt income. The taxpayer had argued that the payment was exempt in s 52-65 which deals with income support supplement payable under the Veterans' Entitlements Act 1986 (VET) on the grounds of permanent incapacity. The AAT found that the exemption did not apply as the payment made to the taxpayer was similar in nature to a workers' compensation payment made to an injured worker. Accordingly, the payments under the SRC Act and VET Act, although both made by the, were completely different. It followed that the payment was not similar to the income support supplement and the taxpayer was not entitled to the exemption claimed. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted: Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts: Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433. Your regular compensation payment is intended to provide financial support and assistance to you as a result of your inability to continue employment. The compensation payment will effectively replace your income from salary and wages. Accordingly, the compensation payment is characterised as income according to ordinary concepts and is therefore included in your assessable income within the terms of section 6-5 of the ITAA 1997.