Private ruling: TAC compensation payments, taxable income, tax rates
Date of advice: 21 August 2018
Published: October 2018
Ruling period: 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019
Date scheme commenced: 1 July 2001

Ruling: Q1: Are the payments received by you from the State A Transport Accident Commission (TAC) assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Are the payments received by you from the TAC taxable at your marginal tax rate? | A2: Yes

Relevant facts and circumstances: Your partner was killed in a road accident in 200X. Since their death you have received pension payments from the TAC as a surviving dependant partner. These payments are made under section 58 of the Transport Accident Act 1986 (Vic) (TAC Act). The payments are based on a percentage of your partner’s pre-accident gross income. The payments will cease when your children finish higher education. The TAC withholds tax from the pension payments at ATO tax table rates that presume a tax free threshold applies to the payment. At the time you began to receive the pension it was your main source of income. You have since resumed paid employment. You have in the past included this payment at the salary and wages question in your tax return. No superannuation contributions are made for you on the pension and financial institutions refuse to recognise it as income for the purposes of issuing loans as it has an end date. You pay more tax than you would otherwise have paid if your partner was alive and earning this income and had access to their own tax free threshold. The ATO call centre has told you to write in for a private ruling to consider your circumstances.

Relevant legislative provisions: Subsection 6-5(2) of the Income Tax Assessment Act 1997 | Subsection 12(1) of Schedule 7 of the Income Tax Rates Act 1986

Reasons for decision: Summary: Income from the TAC pension is ordinary income and taxable at your marginal tax rate. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: ● are earned ● are expected ● are relied upon, and ● have an element of periodicity, recurrence or regularity. Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts (FC of T v Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v FC of T 79 ATC 4641; (1979) 10 ATR 411). This means that where a compensation payment is to replace the loss of ordinary income it will be treated as ordinary income. The note in Taxation Determination TD 92/133 Income tax: who is assessable on weekly payments made under subsection 17(5) of the Commonwealth Employees Rehabilitation and Compensation Act 1988 (CERCA)? Does Division 6AA of Part III of the Income Tax Assessment Act 1936 (ITAA) apply? states that periodic payments made under accident or compensation legislation (e.g. section 58 of the TAC Act) to dependents of deceased persons are considered to be a pension and are taxed at normal rates. Where a partner was employed and providing financial support, under Section 58 of the TAC Act, the TAC is liable pay, to a dependent spouse or partner, an ongoing, regular payment, equivalent to 80% of the partner’s earnings, up to a maximum amount. The TAC has paid you a recurring payment in the form of a pension under the provisions of Section 58 of the TAC Act. A payment made under this provision is assessable under subsection 6-5(2) of the ITAA 1997 as ordinary income and must be included in your income tax return as such. Subsection 12(1) of Schedule 7 of the Income Tax Rates Act 1986 (ITR Act) sets out the rates of tax on the ordinary income of resident taxpayers on income over the tax free threshold. The tax free threshold is a defined term in the ITR Act, meaning $18,200. The payments from the TAC are a replacement for the lost income of your deceased partner. If your partner were alive they would qualify for a separate tax free threshold. In that case the average of tax that you both paid would be less than your current marginal rate of tax when you combine the income from your own work with the TAC pension. However, there is no provision in the tax legislation to allow access to a second tax-free threshold in cases like yours. The s58 pension income is defined in the TAC Act as a payment specifically to the surviving dependant partner. The pension forms part of your ordinary income and is required to be taxed at your marginal tax rates.