Edited version of private ruling

Authorisation Number: 1011870721682

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Ruling

Subject: Assessability of compensation income

Question and answer:

Is the lump sum compensation payment you received assessable income?

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 have a chronic illness which was aggravated because of severe work stress.

You endured physical and psychological suffering as well as illness that was aggravated by your work and managers.

This resulted in psychological injury and in turn resulted in you taking extended sick leave without pay over a three year period after exhausting all your leave entitlements.

You lodged a Workcover claim and the case was settled in the 20XX-XXincome year.

You received a lump sum payment that had an amount of tax withheld in the 20XX-XX income year.

The insurance company paid you this amount in the form of reimbursement for lost wages for almost half the time you were on sick leave without pay in a lump sum payment as compensation.

You have provided reports from your doctors, the Workcover Commissioner the insurance company and letters from your lawyers.

The report from your doctor confirms that you had been suffering with significant chronic illness when you first consulted him.

The Certificate of Determination issued by the Workers Compensation Commission determined:

1) Award in favour of the Respondent in respect of the Applicant's claim for weekly benefits compensation for the following periods:

(i) period 1;

(ii) period 2;

(iii) period 3.

2) Award in favour of the Applicant in respect of his claim for weekly benefits compensation at a weekly rate pursuant to section 36 for the following periods:

(i) period 4; and

(ii) period 5.

3) Award in favour of the Applicant in respect of his claim for weekly benefits compensation at a weekly rate pursuant to section 37 for period 6.

4) Award in favour of the Applicant in respect of his claim for weekly benefits compensation pursuant to section 40 at a weekly rate for period 7.

5) The Respondent to pay the Applicant's section 60 medical and treatment expenses in respect of the psychological injury and the exacerbation, aggravation and/or deterioration of the client's disease.

The Respondent to pay the Applicant's costs as agreed or as assessed.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 159ZRA
Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Please note that all references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Subsection 6-5(2) explains that your assessable income includes ordinary income that you have earned directly or indirectly from all sources during the income year. Ordinary income generally falls within 3 categories:

· income from rendering personal services (such as salary and wages),

· income from property (such as a rental property), interest or dividends; and

· income from carrying on a business.

As the result of various court cases, some additional characteristics have been identified to help determine if certain income is assessable. These include amounts that:

· are earned;

· are expected;

· are relied upon; and

· have an element of periodicity, recurrence or regularity.

As pointed out above, salary and wages are income according to ordinary concepts and are included in your assessable income under section 6-5 of the ITAA 1997.

When determining if an amount paid in compensation is assessable it is also necessary to look at what the individual is being compensated for. The compensation payment generally takes on the same character of what it is being paid for. To this end a payment compensating an individual for lost wages has been determined by the courts to be income under ordinary concepts on many previous occasions.

You received a compensation payment for loss of salary and wages as you were required to take leave without pay after exhausting all your leave entitlements. The payment compensated you for all that time you were on leave without pay and did not receive your salary or wages.

Although your compensation was initiated due to the aggravation of your condition resulting from severe work-related stress, the payment that you received was not made to compensate for your pain and suffering. It was paid to you to compensate for the loss of wages you experienced having exhausted all your leave entitlements. The payment takes on the characteristics of ordinary income as it was paid to replace the wages you lost while on leave without pay. The compensation payment is therefore ordinary income and assessable under section 6-5 of the ITAA 1997.

You will need to declare the lump sum you received in your 20XX-XX income tax return.

Lump sum payment in arrears tax offset

Individual taxpayers who receive certain assessable lump sum payments containing an amount that accrued in earlier income years may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). As your lump sum payment contained amounts that relate to earlier years of income you may be entitled to this tax offset.

The lump sum payment in arrears tax offset is designed to alleviate the problem of more tax being payable in the year in which the lump sum payment is received than would have been payable if the lump sum payment had been taxed in the years in which it accrued.

To be eligible for the lump sum payment in arrears tax offset, certain conditions must be met. Broadly, the tax offset may be available where you receive an amount of specified income in a lump sum payment that contains an amount in arrears, and the arrears amount has been accrued for more than 12 months before the payment date, and is not less than 10% of your normal taxable income of the year in which payment is received.

When completing your income tax return for the 20XX-XX income year, will need to:

· declare the full amount of the lump sum payment in arrears at Category 1 of Question 24 Other Income on the tax return in the Taxpack 2010 Supplement section;

· declare the amount of tax withheld from the lump sum at Item E at Question 24; and

· attach a separate piece of paper titled Schedule of additional information - Other Income containing the following information:

· the years to which the payment related, and

· the amount attributable to each year.

The Tax Office will calculate any applicable tax offset for you.

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