Private ruling: Assessability of lump sum payments
Published: December 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and answers | 1. Will the amount or any portion thereof to be paid in regard to the redemption of medical expenses pursuant to sections 32 and 42 of the Workers Rehabilitation and Compensation Act 1986 (SA), be included in your assessable income? | No. | 2. Will the amount or any portion thereof to be paid in regard to retraining costs pursuant to section 26 of the Workers Rehabilitation and Compensation Act 1986 (SA), be included in your assessable income? | No.

Relevant facts and circumstances: You sustained compensable disabilities said to have arisen from your employment. You will receive a redemption offer in relation to medical expenses pursuant to sections 32 and 42 of the Workers Rehabilitation and Compensation Act 1986 (SA) (WRCA). You will also receive a lump sum payment towards the costs of a retraining course pursuant to section 26 of the WRCA .

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 15-30 | Income Tax Assessment Act 1997 Section 118-37

Reasons for decision: Summary: The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia (sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). | Detailed Reasoning - Ordinary income: 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. 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 or have an element of periodicity, recurrence or regularity. | Detailed Reasoning - Lump sum for redemption of medical expenses: You will receive a lump sum redemption amount pursuant to sections 32 and 42 of the WRCA and the amount received will be in satisfaction of giving up your rights to future medical expenses. These are rights of a capital nature and the money you receive 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. | Detailed Reasoning - Lump sum for retraining costs: Section 26 of the WRCA relates to rehabilitation programmes established or approved by the Workcover Corporation. Payments that may be made pursuant to section 26 include those to assist in the training and retraining of workers (subsection 26(3)(d)). You will receive a lump sum payment towards retraining costs pursuant to section 26 of the WRCA and it is not considered that you will be giving up any capital rights to future payments by receiving this payment . Although you may rely on this payment for your training needs, it is evident that the payment is not derived from your employment, is not earned by you, is not a substitute for income and will not recur in the future. Therefore, the payment you receive will not be assessable as ordinary income. | Detailed Reasoning - Statutory income: Statutory income is included in assessable income by specific provisions in the income tax legislation (section 6-10 of the ITAA 1997). | Detailed Reasoning - Lump sum for redemption of medical expenses: 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 amount to be paid under sections 32 and 42 of the WRCA does not meet this description as it will not be paid for loss of earnings but in satisfaction of the giving up of capital rights. Therefore, the payment will not be assessable under section 15-30 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 amount for medical expenses to be paid under sections 32 and 42 of the WRCA meets this description. Therefore, section 118-37 of the ITAA 1997 will apply to the lump sum redemption amount so that any capital gain or capital loss you make will be disregarded. | Detailed Reasoning - Lump sum for retraining costs: The lump sum amount paid under section 26 of the WRCA is not a compensation payment and will not be paid for loss of earnings. Therefore, sections 15-30 and 118-37 of the ITAA 1997 will not apply to this payment. Further, there are no other provisions in the income tax legislation that will operate to include this amount in your assessable income.