Private ruling: Assessability of workers compensation
Published: September 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Questions and Answers: | 1. Will the lump sum redemption amounts or any portion thereof to be paid pursuant to sections 42 and 32 of the Workers Rehabilitation and Compensation Act 1986 (SA) (WRCA), be included in your assessable income? | No. | 2. Will any capital gain arising from the lump sum redemption amounts be disregarded? | Yes.

Relevant facts and circumstances: You sustained compensable disabilities said to have arisen from your employment. As a result of these injuries, you are entitled to receive weekly income maintenance pursuant to Division 4 of the WRCA and medical and other expenses pursuant to section 32 of the WRCA. You have indicated a willingness to enter into an agreement to terminate your employment. One of the conditions of the agreement is that you will accept two 'once and for all' payments which would extinguish any future rights you have to weekly income maintenance and medical expenses payments.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 15-30. | Income Tax Assessment Act 1997 Section 118-37. | Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Section 82-135.

Reasons for decision: Detailed Reasoning - Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997): Section 6-5 of the ITAA 1997 deals with receipts of ordinary income. It does not operate to include in assessable income amounts of a capital nature. The lump sum redemption amounts are to be paid under sections 32 and 42 of the WRCA. The money to be received will be in satisfaction of giving up your rights to weekly income maintenance payments and future medical expenses. These are rights of a capital nature and the money to be received to compensate you for their relinquishment will similarly be of a capital nature. Section 6-5 of the ITAA 1997 will not apply to the lump sum redemption amounts. | Detailed Reasoning - Section 15-30 of the ITAA 1997: Section 15-30 of the ITAA 1997 operates to include in assessable income: any amount received by way of insurance or indemnity for the loss of an amount if: (a) the loss amount would have been included in your assessable income; and (b) the amount you receive is not assessable as ordinary income under section 6-5. The lump sum redemption amounts to be paid under sections 32 and 42 of the WRCA do not meet this description as they are not paid for loss of earnings but in satisfaction of the giving up of capital rights. Section 15-30 of the ITAA 1997 will not apply to the lump sum redemption amounts. | Detailed Reasoning - Section 82-130 of the ITAA 1997: Subsection 82-130(1) of the ITAA 1997 states that: A payment is an employment termination payment if: (a) it is received by you: (i) in consequence of the termination of your employment; or (ii) after another person's death, in consequence of the termination of the other person's employment; and (b) it is received no later than 12 months after that termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including: · payments for unused annual leave or unused long service leave; · the tax-free part of a genuine redundancy payment or an early retirement scheme payment. · reasonable capital payments for personal injury. | Detailed Reasoning - Paid as a consequence of the termination of your employment: If the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. In this case, you are considering entering into an agreement (the Agreement) in which you would accept two lump sum payments under sections 42 and 32 of the WRCA. In entering the agreement you would relinquish your entitlement to weekly income maintenance payments and medical expense payments. In addition, as stated at paragraph C of the Agreement, you would agree to undertake to resign from your employment. As your resignation from your employment is a condition set out in the Agreement it is considered that the lump sum payment will not be paid unless you undertake to resign from your employment. Although the dominant cause of the payment will be the redemption of your employer's liabilities to make weekly payments of income maintenance and medical expenses, the fact that the termination of your employment is required in order to receive the payment means there is still a causal connection between the termination and the payment. The redemption of your employer's liabilities, the termination and the lump sum payment are all intertwined and connected. It is considered that the payment will be made in consequence of the termination of your employment. Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied. | Detailed Reasoning - The payment is received no later than 12 months after termination: The second condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of your termination of employment, unless you are covered by a determination exempting you from the 12 month rule. The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135 of the ITAA 1997. | Detailed Reasoning - Exclusions under section 82-135 of the ITAA 1997: Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave and the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as certain other payments. In your case, consideration must be given as to whether some or all of the payment is covered by the specific exemption in subsection 82-135(i) of the ITAA 1997. This subsection states that employment termination payments do not include: (i) a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936 ); This exclusion is for a payment or benefit that compensates or reimburses the taxpayer for or in respect of the particular injury. For an amount to meet the definition of consideration in paragraph (i) of the definition of employment termination payment, the payment must be for personal injury and be calculated by reference to the nature and extent of the injury or likely loss to the employee. The amount you will receive under the Agreement will be in satisfaction of giving up your rights to receive future weekly payments, and payments in respect of future medical expenses under section 32 of the WRCA. Your weekly payments were paid in accordance with division 4 of the WRCA. The basis for calculation of weekly payments is set out in section 35 of the WRCA which provides that weekly payments will be made in respect of the compensable injury and the likely effect to the employee's capacity to earn income. The criteria in subsection 82-135(i) is satisfied and the payment is excluded from being an employment termination payment. | Detailed Reasoning - Section 118-37 of the ITAA 1997: Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gains tax event 'relating directly .... to compensation or damages you receive for any wrong or injury you suffer in your occupation.' The lump sum redemption amounts to be paid under sections 32 and 42 of the WRCA meet this description. Section 118-37 of the ITAA 1997 will apply to the lump sum redemption amounts so that any capital gain or capital loss you make will be disregarded.