Disclaimer This edited version will be removed from the Database after 30 September 2025. If you believe the issues detailed in this edited version warrant retention in an alternative form, email publicguidance@ato.gov.au This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011530217523
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: lump sum compensation payment
1. Should the full amount of your lump sum worker's compensation payment to be included as assessable income for the 2008-09 income year
No.
2. Are you entitled to exclude from your assessable income an amount that was repaid to Centrelink in relation to the 2005-06 and 2006-07 income years?
Yes.
3. Are you entitled to exclude from your assessable income the amount repaid to Centrelink in relation to the 2007-08 income year?
No.
This ruling applies for the following periods:
Year ended 30 June 2009
The scheme commenced on
1 July 2005
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
· the application for private ruling, and
· further information received.
You suffered a workplace injury.
Following proceedings with the Workers Compensation Commission, it was agreed that you would receive weekly compensation.
You were paid the relevant amount as a lump sum. This lump sum payment in arrears of weekly benefits was included in the amount showing on your payment summary.
An amount was repaid to Centrelink.
You received assessable Centrelink Newstart/Sickness benefits in the relevent income years. These amounts were declared as assessable income for the relevant years.
You received tax exempt Disability Support benefits for the relevent income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 59-30.
Reasons for decision
Detailed reasoning
Compensation payments
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income. Characteristics of ordinary 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.
For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443; (1952) 10 ATD 82) (Dixon's case). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142; (1989) 20 ATR 1516, Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411, and Case Y47 91 ATC 433; AAT Case 7328 (1991) 22 ATR 3422).
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. FC of T 99 ATC 2166; (1999) 41 ATR 1138. In that case Mathews J found that payments made to replace income take on the character of the payment they replace and that the method of payment does not alter the character of the payment. 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 in 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.
Therefore, where future regular payments are ordinary income and commuted to a lump sum, the lump sum payment also retains the character of being ordinary income and would be assessable in the income year in which the payment was received.
In your case, you received a lump sum for your previous years entitlement. The receipt of your weekly entitlements as a lump sum does not change the nature of the payment. The payment is regarded as ordinary assessable income and is assessable under subsection 6-5(2) of the ITAA 1997.
Repaid assessable Centrelink benefits
Section 59-30 of the ITAA 1997 operates to exclude an amount from your assessable income for an income year if you have repaid it in a later income year and you cannot deduct the repayment in any income year.
However, subsection 59-30(3) of the ITAA 1997 states that section 59-30 does not apply to an amount you must repay because you received a lump sum as compensation or damages for a wrong or injury you suffered in your occupation.
As you received compensation for a work place injury, subsection 59-30(3) of the ITAA 1997 applies in your case. Therefore, section 59-30 of the ITAA 1997 has no application in your circumstances.
Taxation Ruling IT 2107 states that where workers' compensation is awarded after payment of assessable sickness benefits, the appropriate amount of sickness benefits is to be repaid to the Director General of Social Security. Provision is made for the repayment from the lump sum payment due to the employee. In these circumstances it is considered that the amount of the lump sum arrears of compensation reduced by the amount of sickness benefits repaid to the Director General of Social Security is the amount to be included in the assessable income of the compensated party in the year of receipt.
You received support from Centrelink after your workplace injury. You were subsequently awarded a lump sum workers' compensation payment. A portion of the lump sum received was used to repay Centrelink for the support you had received.
Therefore, in applying IT 2107, the lump sum payment included as assessable income on your 2008-09 income tax return should be reduced by the amount of assessable Centrelink payments you received for the same period.
In your case, you received assessable Centrelink benefits. Therefore, the assessable lump sum payment amount should be reduced by the amount equal to your previous assessable Centrelink income for these years.
Repaid tax exempt Centrelink benefits
The principles in IT 2107 do not apply to the repaid Centrelink benefits previously received in the 2007-08 income year. This is because these Centrelink benefits were not assessable. The receipt of the lump sum or the fact that you have now repaid Centrelink does not change the nature or character of these payments.
Similar circumstances were found in Rayner v. FC of T 98 ATC 2310; (1998) 40 ATR 1084. In this case, the taxpayer was injured at his place of work and received workers' compensation payments from the Workers' Compensation Board of Queensland, totalling $18,327. The payments were included in his assessable income for the 1995 tax year. The taxpayer subsequently sued his employer for damages relating to his injuries and received an amount of $25,000 in settlement. Of that amount, $18,327 was refunded to the Board. The taxpayer then requested an amended assessment for a refund of tax.
It was found that the subsequent repayment of the workers' compensation payments had no tax consequences. The taxpayer overlooked the fact that he really received $18,327 twice for his period of incapacity for work: the first when he received workers' compensation payments; the second when he received the damages. That is, the amount of damages calculated had been increased to take into account the fact that workers' compensation payments would have to be repaid out of the lump sum. He had to repay the Board out of the damages received as the workers' compensation legislation does not allow a taxpayer to keep two payments for incapacity for work for the same period in these circumstances. It was not true to say that the taxpayer had not had the benefit of the $18,327 which he received in the 1995 taxation year. He had the benefit of it and paid tax on the benefit when it was received. The taxpayer was denied his request to amend his 1995 assessment. No amendment of the assessment was warranted, legally or morally.
A similar decision was made in Case W78, 89 ATC 701. Mr G L McDonald, of the Administrative Appeals Tribunal stated at p 704:
Workers' compensation payments stand in the place of salary earned and are not subject to recoupment. The amount refunded pursuant to the workers' compensation legislation is refunded because the statute requires the defendant in the action to make the payment. If the workers' compensation legislation did not require the repayment to be made, the damages awarded to the plaintiff/applicant would be adjusted to take account of the weekly or fortnightly workers' compensation payments made to the date of judgement. That being the case, no obligation would arise requiring the applicant/plaintiff to repay any workers' compensation payments which he had earlier received.
Similarly, where a repayment of Centrelink payments is required as a result of a person receiving a lump sum compensation payment, the lump sum should have adequately compensated the person by including an equivalent amount as part of the lump sum. Therefore, the person is not under-compensated by being required to make the repayment.
In this situation, the Commissioner of Taxation does not amend an assessment to exclude the repaid Centrelink amounts.
Therefore, the repaid Centrelink benefits from the income year have no effect on your assessable income. You were not under-compensated by making these payments as your lump sum should have been calculated to take into account the fact that you would have to repay Centrelink. Even if the lump sum was not increased to take the repayments into account, the anomaly does not arise out of taxation laws. Therefore, the relevant amount is not excluded from your assessable income.
Please note, it is acknowledged that a true reimbursement of an expense is not assessable income. However, the repayment of income is not the same as a reimbursement of an expense for taxation purposes. Taxation Ruling TR 92/15 provides further details on what is a reimbursement. This ruling has no application in your circumstances.
Please note, you may be entitled to a lump sum payment in arrears tax offset.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).