Private ruling: Assessability of compensation payment
Published: December 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2009

Ruling: Question and answer | Is the lump sum compensation payment you received under a workers compensation claim assessable income? | Yes.

Relevant facts and circumstances: You were incapacitated and unable to work for a set period of time due to a workplace injury. You were awarded compensation under section 35A of the Workers Rehabilitation and Compensation Act (WRCA) to replace income you were unable to earn during this period. You were paid a lump sum payment. This payment was in full and final settlement of any further claims under the Act.

Relevant legislative provisions: Income tax Assessment Act 1997 Section 6-5 | Income tax Assessment Act 1997 Subsection 6-5(2) | Income tax Assessment Act 1997 Subsection 6-5(4)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, 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. Payments of salary and wages are examples of ordinary income. Receipts that are not salary or wages, but are paid as a substitute for salary or wages that would normally have been earned, expected and relied upon by a taxpayer, are also assessable as ordinary income. The general principle is that such payments take on the character of the salary or wages they replace. That is, if the substituted amount was an amount of ordinary income, the amount paid to compensate for the loss of that amount will also be ordinary income. In your case the payment was awarded to you to replace income you were unable to earn whilst incapacitated. As the payment is compensating you for income that would have been assessable income, this payment is therefore treated as also being assessable income and must be included in your income tax return in the year that you received the payment.

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