Private ruling: Assessable income
Date of advice: 12 January 2021
Published: March 2021
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the payments received for Loss of Earning Capacity (LOEC) assessable income? | A1: No | Q2: Are the payments received for Loss of Earnings (LOE) assessable income? | A2: Yes

Relevant facts and circumstances: You witnessed a fatal motor vehicle accident. As a result of witnessing the accident, you developed a trauma-related illness. You also began experiencing symptoms related to a previously well-controlled mental illness. You have a range of other chronic health conditions. You have been unable to return to work since witnessing the accident. As a result of you being unable to work, you submitted a claim for Loss of Earnings (LOE) to the relevant government body. After submitting the claim, you received a letter to say that your claim for LOE was accepted. You were paid a gross amount per week, based on a calculation of your pre-accident weekly earnings. Pay-As-You-Go (PAYG) amounts were withheld from these payments. In accordance with the Transport Accident Act 1986 (TAA), LOE payments can only be made for a maximum of 18 months. As this period has elapsed, you have submitted a claim for Loss of Earning Capacity (LOEC) Following acceptance of your claim, you have received an amount per week for LOEC. This amount is based on the difference between your capacity to earn income before your transport accident injury, and your actual capacity to earn income after your transport accident injury. You were provided with a letter that states that the relevant government body believes these payments are not assessable income. The letter states that the LOEC benefits are a payment for the loss of your ability to earn, rather than what you were earning prior to the transport accident.

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 6-15

Reasons for decision: Detailed Reasoning - Assessable income: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income of the Australian resident individual includes the ordinary income they derive directly or indirectly from all sources, whether in or out of Australia, during the income year. Ordinary income is income you receive from rendering personal services, income from property and income from carrying on a business. Ordinary income has the following characteristics - it is expected, relied upon, earned and has an element of periodicity, recurrence or regularity. For an amount to be characterised as ordinary income, it must be considered to be income in nature, as opposed to capital. | Detailed Reasoning - Capital receipts: Amounts received that are capital or capital in nature are not ordinary income. The capacity to earn income is a capital asset and not ordinary income. Therefore, amounts received to compensate for the loss of a capital asset are capital receipts and do not constitute ordinary income. For income tax purposes, the relevant principles in determining whether an amount received is a receipt of income (or capital) include: • An amount paid to compensate for a loss generally acquires the character of that for which it is substituted. • Payments which are a substitute for income have been held to be income under ordinary concepts. Some amounts that are not ordinary income may be included in a taxpayer's assessable income as statutory income. Types of amounts that are statutory income are listed in section 6-10 of the ITAA 1997. | Summary: Amounts received for loss of earning capacity do not form part of your assessable income. As the amounts are neither ordinary nor statutory income, they are not assessable. | Detailed Reasoning - Loss of earning capacity: As you were employed at the date of the accident, LOEC benefits are payable from 18 months after the accident until any of the events listed in section 53 of the Transport Accident Act 1986 (TAA) occur. These payments are made to those who have lost or had their capacity to earn income reduced after a transport accident. When working out whether an amount is income, it is necessary to look at what the amount was paid for and the circumstances surrounding the payment. In this instance, the amounts are received to compensate for the fact that you can no longer earn the amount of income you were previously able to. As the advantage they are compensating for is capital in nature, so too are the payments. As the payments are made to compensate for your reduced capacity to earn income, they are not ordinary income. Nor are the payments listed in section 10-5 of the ITAA 1997, which outlines amounts that are statutory income. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently, no part of the amounts you receive for future loss ofearning capacity is included in your assessable income. | Summary: Amounts received for loss of earnings benefits from the TAC are assessable income. These amounts are paid to replace income as you were unable to work following a transport accident. | Detailed Reasoning - Loss of earnings: LOE benefits are compensation in the form of a fortnightly payment payable to a person who has incurred a loss of earnings in the first 18 months after a transport accident, or 18 months after an injury first manifests itself. LOE benefits are paid in accordance with section 44 of the TAA. You witnessed a transport accident and received loss of earnings benefits for a period following this. The payments are made to replace your income whilst you are unable to work. They are calculated based on your pre-accident weekly earnings. As these payments are a replacement for your income, they are assessable income.