Private ruling: Income vs capital
Date of advice: 13 March 2018
Published: June 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Does the lump sum payment you received need to be included in your assessable income in the year that it is received? | A1: Yes.

Relevant facts and circumstances: You suffered an injury related to your employment. You have not returned to work. Your previous employer continued to pay you for an extended period. You lodged an application for weekly payments of compensation with WorkCover Australia under the Workers’ Compensation and Injury Management Act (the Act) 1981 (X). Your previous employer ceased paying your salary payments as they terminated you from your position. Your previous employer, being self-insured for the purposes of worker’s compensation, declined your application for weekly payments of compensation. You took your claim for weekly payments of compensation to the WorkCover Worker’s Compensation Arbitration Service. Documents you have provided states: Application for weekly payments of compensation. The orders delivered by Arbitrator made were that your previous employer was to pay you weekly payments for total incapacity from the date of your injury. You received this payment as a lump sum, up to a prescribed amount as stated in the Act. You have not presented any evidence that your lump sum payment was for loss of earning capacity.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5(2) | Income Tax Assessment Act 1997 Section 54-45 | Income Tax Assessment Act 1997 Paragraph 118-37(1)(a) | Workers’ Compensation and Injury Management Act 1981 (X) Section 18

Reasons for decision: Summary: 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. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82). Compensation payments that substitute for income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR 1516)). The order for weekly payments of compensation retains the characteristics of ordinary income even though it was paid as a lump sum. Whether the redemption or conversion of an entitlement from periodic payments to a lump sum affects assessability as ordinary income was considered in Coward v. FC of T 99 ATC 2166; (1999) 41 ATR 1138. In that case Mathews J found that payments made to replace income take on the character of the payment they replace and that the method of payment does not alter the character of the payment. Mathews J held that as the weekly compensation payments made to the appellant until he turned 65 were paid for loss of earnings and thus constituted income, a lump sum representing redemption of those future weekly payments was also income. Pursuant to section 18 of the Act, you have been paid a compensation payment in accordance with schedule 1 of the Act for total or partial incapacity. Schedule 1 section 7(1) states: When total incapacity for work results from the injury a weekly payment during the incapacity equal to the weekly earnings of the worker calculated and varied in accordance with this Schedule. Schedule 1 section 7(3) states: An entitlement of a worker to weekly payments for an injury under this Act ceases if and when the total weekly payments for that injury reaches the prescribed amount, unless an arbitrator makes an order to the contrary under section 217, and there shall be no revival of, or increase in, that entitlement upon any subsequent increase in the prescribed amount. In your case, the arbitration service gave direction to determine your entitlement to compensation for injuries resulting in total incapacity for work. You have been paid a lump sum payment which represents a replacement of your employment income for the period from XXXX until the total weekly payments for that injury reaches the prescribed amount as stated in the Act. You make reference to a number of cases in your private ruling application. We acknowledge your interpretation of the cases however these are not the same as your situation. Slaven v. Federal Commissioner of Taxation (1983) ATC 4387, sought an appeal of the decision treating compensation payments as assessable income. The claim was in relation to the taxpayer’s capacity to earn assessable income, the capital asset, rather than the actual income forfeited, as revenue resulting from the capital asset. This differs to your case as schedule 1 section 7(1) of the Act clearly states, when total incapacity for work results from the injury a weekly payment during the incapacity will be received by the injured. In addition, you have not presented any evidence that supports your claim that the payment was for loss of earning capacity. In McLaurin v FC of T ( 1961) 104CLR 381, the High Court considered whether it was appropriate to apportion unliquidated damages. This differs to your case as you have not been paid a compensation payment for a capital asset. As presented in the Arbitrator’s decision, you have received a lump sum designed for weekly payments of compensation. The character of this payment does not change even though you have received the payment as a lump sum. Therefore, as the weekly payments of compensation retain the characteristics of ordinary income even when paid as a lump sum, your lump sum compensation amount you received is considered a payment for loss of income for the purposes of the ITAA 1997. Your personal circumstances and injury are acknowledged, however your lump sum was calculated without regard to the nature of your personal injury or reference to your loss of earning capacity. The payment represents an income replacement and support for the period you were unable to work. Consequently, your lump sum compensation payment is fully assessable in the financial year the payment was received. As the amount you received is not considered to be a payment for personal injury paragraph 118-37(1)(b) does not apply. Please note that as the payment is assessable income, the full PAYG amount cannot be refunded. In order to see if you are entitled to a partial refund, you will be required to lodge an income tax return declaring all our your assessable income for the financial year.