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This edited version has been archived due to the length of time since original publication.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.

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Edited version of your private ruling

Authorisation Number: 1012388759817

Ruling

Subject: Compensation lump sum payment

Questions and answers:

1. Is the lump sum workers compensation payment paid to you for loss of wages assessable?

2. Is the lump sum workers compensation payment assessable in the year it was received?

3. Can the repaid Centrelink amounts be excluded from your assessable income?

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You will receive a lump sum payment for loss of wages.

You have been receiving a non taxable pension from Centrelink for the period you have been off work.

The amount you have received from Centrelink will be repaid back out of the lump sum payment you receive.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5

Income Tax Assessment Act 1997 Section 59-30

Income Tax Assessment Act 1997 Section 59-30 (3)

Income Tax Assessment Act 1936 Section 159ZRA

Reasons for decision

Ordinary income

Section 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes income according to ordinary concepts (ordinary income).

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

A compensation amount generally bears the character of that which it is designed to replace. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts, whether or not they are paid as a lump sum for a given period of time. The payment takes on the nature of ordinary income, and as such, is taxable.

The payment you will receive is compensation for loss of income. Payments to replace income are considered to be income and therefore the lump sum payment you will receive is assessable in the financial year in which it is received.

Income year payment is received

A lump sum compensation amount received for loss of income over a period is assessable in the income year it is received even if the loss of income occurred in a previous income year.

Repaid tax exempt disability support pension

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 will receive compensation for a work place injury, section 59-30 of the ITAA 1997 does not apply in your circumstances.

Taxation Ruling IT 2107 deals with social security sickness benefits and workers' compensation benefits. It states that where workers' compensation is awarded after payment of assessable sickness benefits, the appropriate amount of sickness benefits is to be repaid to Social Security. 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 Social security is the amount of be included in the assessable income of the compensated party in the year of receipt. It is this net amount only that should be subject to PAYE deductions and included on payment summaries.

In your case you received non taxable disability support payments from Centrelink. You will be paid a lump sum compensation payment. An amount of the lump sum you will receive will be used to repay Centrelink for the support you had received.

The principles in IT 2107 do not apply to the repaid Centrelink benefits previously received by you. This is because these Centrelink benefits were not assessable. The receipt of the lump sum or the fact that you will be repaying Centrelink does not change the nature or character of these payments.

Other information - Lump sum in arrears tax offset

Taxpayers who receive eligible assessable lump sum payments containing an amount that accrued in earlier income years, maybe entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936).

The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in each of the years in which it accrued.

To be eligible for the tax offset, the amount of the eligible lump sum that accrued before the year of receipt must not be less than 10% of the 'normal taxable income' of the year of receipt.

For further information on lump sum payment in arrears, please refer to our website www.ato.gov.au

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