Private ruling: Lump sum compensation payments
Date of advice: 18 February 2021
Published: April 2021
Ruling period: Financial year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the back payment of your entitlement to the supplementary allowance plus the interest on arrears paid pursuant to subsection 59(9) and section 65 of the of the Return to Work Act 2014 (South Australia) (RTW Act) assessable income? | A1: Yes. | Q2: Is the commuted lump sum payment of your future entitlement to the supplementary allowance paid pursuant of subsection 59(11) of the RTW Act assessable as ordinary income or as a capital gain? | A2: No.

Relevant facts and circumstances: As a result of the death of a family member, you made a claim under subsection 59(9) of the RTW Act. Subsection 59(9) of the RTW Act states: Subject to subsection (10), if the child of a deceased worker who is entitled to weekly payments under this section is under the age of 18 years and is in the care of a person other than a dependent spouse or domestic partner of the worker, that person will, if the Corporation so determines, be entitled to a supplementary allowance to assist in the care of the child until- (a) the child attains the age of 18 years; or (b) the person ceases to have the care of the child, whichever first occurs. As part of your claim, you also elected to commute your future entitlement to the supplementary allowance to a lump sum under subsection 59(11) of the RTW Act. Subsection 59(11) of the RTW Act states: A liability to make weekly payments under this section may, on application by the person entitled to the weekly payments, be commuted to a liability to make a capital payment that is actuarially equivalent to the weekly payments. The Return to Work Corporation of South Australia (the Corporation) rejected the claims on the basis that the deceased's death did not arise from their employment. You exercised your rights to have the decisions reviewed by the South Australian Employment Tribunal (SAET). In the course of the settlement negotiations an agreement was reached and with consent of the all the parties, the decision by the Corporation rejecting the claims for compensation brought in consequence of the death of the deceased were set aside and substituted with Orders. You were found to be entitled to arrears of weekly payments pursuant to subsection 59(9) of the RTW Act, plus interest on arrears payable pursuant to section 65 of the RTW Act. Your application to commute your future entitlement to weekly payments, made pursuant to subsection 59(11) of the RTWA was also accepted. As the making of the supplementary allowance payments was delayed pending resolution of a dispute the amount payable in arrears was increased by interest calculated at the prescribed rate in accordance with section 65 of the RWA and the South Australian Return to Work Regulations 2015 (the Regulations). Section 65 of the RTW Act states: - 65 - Augmentation of weekly payment in consequence of delay (1) Subject to subsection (2), if- (a) a weekly payment, or part of a weekly payment, is not paid as and when required to be paid under this Act; or (b) the making of a weekly payment is delayed pending resolution of a dispute under this Act, any amount in arrears will be increased by interest at the prescribed rate. (2) No interest is payable under this section if the delay is attributed to some fault on the part of the worker. Section 38 of the Regulations state: - 38 - Rate of Interest payable on weekly payments in arrears (section 65 of the Act) (1) Subject to subregulation (2), for the purposes of section 65(1) of the Act, the amount in arrears will be increased by interest on the amount at the prime bank rate for the financial year in which the amount went into arrears, compounded on a weekly basis for each complete week that the amount is in arrears. (2) If the amount the worker is entitled to be paid relates to more than 1 financial year, those amounts will be increased by interest at the relevant prime bank rate for each financial year, compounded on a weekly basis. The back payment of the supplementary allowance plus the interest on arrears and the commuted lump sum was paid to you by the Corporation in the 20XX financial year.

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 104-25 | Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(ii)

Reasons for decision: Summary: A receipt is assessable income if: • it is income in the ordinary sense of the word (ordinary income); or • it is not ordinary income but through the operation of the legislation it is included in assessable income (statutory income). | Detailed Reasoning - Ordinary Income: Subsection 6-5(1) 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. Based on case law, it can be said that ordinary income generally includes 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). | Detailed Reasoning - Section 59 of the RTW Act: Compensation in the form of weekly payments is payable to specified dependents under section 59 of the RTW Act, if a worker dies as a result of a work injury. The amount of the payment received is based on the worker's average weekly earnings and the extent of the dependency. Where the recipient of the weekly payments is a child under the age of 18 years and they are in the care of a person other than a dependent spouse of domestic partner of the worker, that person will, if the Corporation so determines, be entitled to a supplementary allowance to assist in the care of the child until either the child attains the age of 18 years or the person ceases to have the care of the child, whichever first occurs. However, if a child is by reason of a disability incapable of earning a living, the Corporation may pay a supplementary allowance under subsection 59(9) of the RTW Act during the period of that incapacity even though the child has attained the age of 18 years. Subsection 59(11) of the RTW Act provides that any weekly payments payable under section 59 can be commuted to a lump sum payment. Compensation payable under section 59 of the RWA is for the loss of the deceased's financial support and not for the loss of the recipient's income. Where the supplementary allowance amount is paid by way of weekly payments, the regularity of the receipt of those weekly payments means that they are income according to ordinary concepts when received. A lump sum back payment of the supplementary allowance retains the same character as the weekly payments that should have been received previously and therefore is income in nature. However, when you elect to commute your future entitlement to the weekly payments to a lump sum amount under subsection 59(11) of the RTW Act, the lump sum has no characteristics of ordinary income as it is compensation for the loss of the deceased's financial support rather than for the loss of the recipient's income and it lacks any element of periodicity, recurrence or regularity. Therefore, the amount is capital in nature. | Detailed Reasoning - Lump sum payments in arrears of weekly payments and interest on the arrears: Taxation Ruling TR 98/1 deals with the derivation of ordinary income and states that the general rule with non-trading income is that it is derived when it is received. Subsection 9-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it was derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs. An amount received as a lump sum representing arrears of weekly compensation payments are classified as ordinary income and are assessable in the income year received. This is the case even though the payment relates to earlier income years. Interest, or amounts received that are in the nature of interest, and which can be identified as interest, and whether paid as part of the compensation or separately, are also assessable in the income year of receipt. | Detailed Reasoning - Statutory income: The receipt of the commuted lump sum payment amount may give rise to a capital gain (statutory income) under capital gains tax (CGT) event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(ii) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong, injury or illness suffered by a person or relative of that person. In your case, the compensation received is for a wrong, injury or illness you or your relative personally suffers, being the death of a family member. Therefore, any capital gain or capital loss arising from the CGT event is disregarded under subparagraph 118-37(1)(a)(ii) of the ITAA 1997. | Detailed Reasoning - Conclusion: The back payment of the weekly supplementary allowance, plus the interest on the arrears paid pursuant to subsection 59(9) and section 65 of the RTW Act is assessable as ordinary income in the year of receipt, being the 20XX financial year. The commuted lump sum payment of your future entitlement to the weekly supplementary allowance paid pursuant to subsection 59(11) of the RTW Act is not assessable as either ordinary or statutory income and you are not required to include the amount in your assessable income.