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Edited version of private ruling

Authorisation Number: 1011577799611

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Ruling

Subject: Assessability of workers compensation

Questions and Answers

Will the lump sum payment or any portion thereof to be paid pursuant to sections 42A and 32 of the Workers Rehabilitation and Compensation Act 1986 (SA) (WRCA), be included in your assessable income?

No. 

Will any capital gain arising from the lump sum payment be disregarded?

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You sustained compensable disabilities said to have arisen from your employment.

As a result of these injuries, you are entitled to receive interim payments for loss of earning capacity and medical and other expenses pursuant to section 32 of the WRCA.

You have indicated a willingness to accept two 'once and for all' payments which would extinguish any future rights you have to interim payments for loss of earning capacity and medical expenses payments.

An interim assessment in relation to the payment under section 42A of the WCRA was made prior to 1 July 2008.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-10.
Income Tax Assessment Act 1997 Subsection 15-30.
Income Tax Assessment Act 1997 Paragraph 118-37(1)(a).

Reasons for decision

Subsection 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)

Section 6-5 of the ITAA 1997 deals with receipts of ordinary income. It does not operate to include in assessable income amounts of a capital nature.

The character of a lump sum compensation payment or insurance benefit is derived from the terms of the particular policy or legislation and the reason for making the payment.

Taxation Ruling IT 2193 deals with the issue of compensation of the loss of earning capacity. IT 2193 makes it clear that compensation for loss of earning capacity will not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the taxpayer would have earned.

The lump sum amounts are to be paid under sections 32 and 42A of the WRCA. The money to be received will be for your loss of earning capacity and in satisfaction of giving up your rights to future medical expenses.

These are rights of a capital nature and the money to be received to compensate you for their relinquishment will similarly be of a capital nature. Section 6-5 of the ITAA 1997 will not apply to the lump sum redemption amounts.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Amounts received in respect of personal injury which are not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.

Section 15-30 of the ITAA 1997

Section 15-30 of the ITAA 1997 operates to include in a taxpayer's assessable income- 

any amount received by way of insurance or indemnity for the loss of an amount if:

The compensation amount to be paid under sections 32 and 42A of the WRCA does not meet this description as it is not paid for loss of earnings but in satisfaction of the giving up of capital rights.

Section 15-30 of the ITAA 1997 will not apply to the compensation amount.

Section 118-37 of the ITAA 1997

Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gain tax event 'relating directly .... to compensation or damages you receive for any wrong or injury you suffer in your occupation.'

The compensation amount to be paid under sections 32 and 42A of the WRCA meets this description.

Section 118-37 of the ITAA 1997 will apply to the compensation amount so that any capital gain or capital loss you make will be disregarded

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