Private ruling: Assessability of payment
Date of advice: 15 June 2017
Published: October 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the lump sum payment for the weekly payments of compensation regarded as ordinary assessable income? | A1: Yes | Q2: Is the lump sum payment paid to you for future medical expenses regarded as ordinary assessable income? | A2: No.

Relevant facts and circumstances: You were injured at work which resulted in permanent incapacity. Due to the permanent disability, you have not been, and will not be able to engage in future gainful employment. You have settled an agreement, being recorded pursuant to section 76 of the Workers Compensation and Injury Management Act 1981 , with the employer. You signed a Memorandum of Agreement between you and your employer. The Agreement states: “Upon the agreement being recorded pursuant to section 76 of the Workers Compensation and Injury Management Act 1981 (“the Act”) the worker’s claims referred to in this Agreement are finalised and the employer shall pay to the worker, and the worker shall accept, the lump sum of $XXXX” The lump sum is made up as follows (a) weekly payments of compensation (i) By way of redemption of liability to make future weekly payments as for permanent partial incapacity; (b) expenses as are provided for in the Workers Compensation and Injury Management Act 1981 Schedule 1 clauses 9, 10, 17, 18, 18A and 19 namely;

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

Reasons for decision: Detailed Reasoning - Lump sum payment: 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. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433). Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation/settlement payment is assessable, and states that such a payment is assessable income: ● if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined), or ● to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature. It is well established that, in general, insurance moneys are received on revenue account where the purpose of the insurance was to fill the place of the revenue receipt which the event insured against has prevented from arising ( Carapark Holdings Ltd v. Federal Commissioner of Taxation (1967) 115 CLR at 633). The issue of whether the redemption or conversion of an entitlement to periodic payments to a lump sum affects assessability was considered by the Commissioner in Taxation Determination TD 93/3. As outlined in paragraph 4 of TD 93/3, such a commutation would result in the lump sum remaining assessable, as its effect is simply to pay in advance the future periodic payments. This view has also been confirmed in Sommer v. FC of T 2002 ATC 4815; 51 ATR 102 ( Sommer’s case) . The case involved a medical practitioner who had taken out an income protection policy. Following the rejection of the taxpayer’s claim for income replacement payments of $4,000 per month, the matter was settled out of court with the taxpayer receiving a lump sum. The taxpayer argued that the amount was a payment of capital as it was paid as consideration for the cancellation of the policy, and the surrender of his rights under it or that the payment was capital as it was an undissected aggregation of both income and capital. In dismissing the taxpayer’s appeal it was held that the payment was in settlement of income claims of the taxpayer in circumstances where the purpose of the insurance policy was to fill the place of a revenue receipt. As a result, the payment was clearly on revenue account. The fact that the payment was received in one lump sum did not change its revenue character. It is acknowledged that in accepting the lump sum you will give up your rights in relation to compensation. However, it is considered that your case is similar to Sommer’s case and the lump sum represents a redemption of the right to receive income and is also regarded as income in nature. The fact that the income will be made in one lump sum does not change the revenue character of the receipt as it will essentially be designed to compensate you in respect of your income claims, or as a payment in substitution of those claims. Consequently, a lump sum payment, which relieves the obligation to make future payments to you retains its character of ordinary income and is assessable under section 6-5 of the ITAA 1997 in the year that you receive it. | Detailed Reasoning - Expenses: Although the payment can be said to be expected, and perhaps relied upon in order to pay your medical bills, this expectation arises from the medical treatment required resulting from the injury, rather than from a relationship to personal services performed. Accordingly, the payment is not ordinary income and is therefore, not assessable under section 6-5 of the ITAA 1997. Section 15-30 of the ITAA 1997 operates to include in your 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 amount paid to you for future medical expenses does not meet this description as it was not paid for loss of earnings but in satisfaction of the giving up of capital rights. Section 15-30 of the ITAA 1997 does not apply to the lump sum amount of $33,677. 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 amount paid meets this description. Therefore, section 118-37 of the ITAA 1997 applies to the lump sum amount so that any capital gain you make will be disregarded.