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Edited version of private ruling

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Ruling

Subject: Compensation - commutation - disability payments

Question 1

Is a redemption of weekly compensation payments paid as a lump sum under section 137 of the Safety, Rehabilitation and Compensation Act 1988 (SRCA 1988) assessable income?

Answer: Yes

This ruling applies for the following period:

Year ending 30 June 2007

The scheme commenced on:

1 July 2006

Relevant facts and circumstances

You sustained an injury whilst you were a member of the Australian Defence Force.

The injury resulted in your incapacity to work.

You received periodical compensation payments in respect of your defence force income under the SRCA 1988.

Your entitlement to periodical amounts for the lost income was subsequently redeemed by the payment of a lump sum under section 137 of the SRCA 1988.

You received the redemption payment and tax was withheld from the payment.

You received the redemption payment in the particular income year.

You included the redemption payment in your particular income tax return for that year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Subsection 6-5(2).

Reasons for decision

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.  

Based on case law, it can be said that ordinary income generally includes receipts that:

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;10 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. 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.

The lump sum redemption payment is derived at the time of receipt and is assessable in the relevant year.

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