Private ruling: Compensation payment
Published: June 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is a redemption of weekly compensation payments paid as a lump sum assessable income? | A1: Yes. | Q2: Is a lump sum payment paid for medical and travel expenses assessable income? | A2: No

Relevant facts and circumstances: You incurred a workplace injury. You lodged a workers' compensation claim with your employer. The injury resulted in your incapacity to work. You have been receiving weekly benefits that have been included as assessable income. Your insurer made a lump sum payment offer to settle your worker's compensation claim. You signed a memorandum of agreement between you and your employer agreeing to a lump sum payment being: · for weekly payments of compensation by way of redemption of liability to make future weekly payments for permanent total incapacity · for medical and travelling expenses.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision: Summary: 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. The periodical compensation payments received by you are income according to ordinary concepts as these were paid to replace income to compensate for the loss of earnings as a result of injury suffered at work. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; ATD 82). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts ( FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411. The issue of whether the redemption or conversion of an entitlement to periodic payments to a lump sum affects assessability was considered in Coward v. Federal Commissioner of Taxation 99 ATC 2166; (1999) 41 ATR 1138. In that case Mathews J held that as the weekly compensation payments made to the appellant until he turned 65 were paid for loss of earnings and thus constituted income, a lump sum representing redemption of those future weekly payments was also income. This is consistent with the approach taken by the Commissioner of Taxation Determination TD 93/3 which deals with the partial commutation of periodic payments to a lump sum. As outlined in paragraph 4 of TD 93/3, such a commutation would result in the lump sum remaining assessable, as its effect was simply to pay in advance the future weekly payments. You were offered a lump sum payment in full settlement of your worker's compensation claim. That is your future weekly payments being commuted to a lump sum. The lump sum is being paid to substitute you for your loss of income which you otherwise would have earned. As the weekly income replacement payments were ordinary income, a lump sum payment also retains the character of being ordinary income. Accordingly, the lump sum payment received for redemption of liability to make future weekly payments is assessable under section 6-5 of the ITAA 1997 in the income year in which you receive the payment. | Detailed Reasoning - Medical and Travel expenses: In your case, the lump sum amount paid to you in satisfaction of giving up your rights to future medical expenses and other expenses incurred by you. These rights are of a capital nature, as is the lump sum payment received by you to compensate you for relinquishing those rights. The lump sum payment you have received for medical and travel expenses will not be assessable as ordinary income under the provisions of section 6-5 of the ITAA 1997. Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. Section 102-5 of the ITAA 1997 provides that assessable income includes net capital gains for the income year. However, a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally is disregarded, paragraph 118-37(1)(b) of the ITAA 1997. Accordingly, the settlement amount you will receive is not assessable as statutory income under section 6-10 of the ITAA 1997. As the lump sum amount paid to you for your medical and other expenses is not assessable as either ordinary income or statutory income and no part of it is included in your assessable income.