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Ruling
Subject: Compensation payment
Question
1. Will the lump sum redemption amount commutation of weekly incapacity payments be included in your assessable income?
Yes.
2. Will a capital gain arise from the receipt of the lump sum payment?
No.
This ruling applies for the following period
Year ending 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts
You have an accepted claim for compensation pursuant to the Safety, Rehabilitation and Compensation Act 1988 (SRCA 1988).
As a part of the claim, you receive weekly incapacity payments pursuant to section 19 of the SRCA 1988.
The compensating authority has proposed to resolve your ongoing entitlement to weekly incapacity payments by making a lump sum redemption payment pursuant to section 30 of SRCA 1988.
Section 30 of the SRCA 1988 provides a formula for the calculation of the lump sum redemption payment amount.
Relevant legislative provisions
Income Tax Assessment Act 1997
Subsection 6-5(2).
Safety, Rehabilitation and Compensation Act 1988
Section 19
Section 30
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year. It does not operate to include in your assessable income any amount of a capital nature.
Based on case law, it can be said that ordinary income generally includes receipts that:
· are earned
· are expected
· are relied upon, and
· have an element of periodicity, recurrence or regularity.
An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v Dixon (1952) 86 CLR 540).
You are currently receiving weekly incapacity payments pursuant to section 19 of the Safety, Rehabilitation and Compensation Act 1988.
The weekly payments have the character of being income because they are regular, expected and relied upon (FC of T v Inkster 89 ATC 5142; 20 ATR 1516).
Conversion of weekly payments into a lump sum
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 a redemption of those future weekly payments was also income.
This principle was reiterated in the case of Sommer v FC of T [2002] FCA 1205, where Merkel J held (at 16):
The fact that the payment of the monthly benefits in the present case is made in one lump sum does not change the revenue character of the receipt if it was essentially designed to compensate the applicant in respect of his income replacement claims or was a payment in substitution for those claims
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. TD 93/3 states at paragraph 4:
We consider that a lump sum payment, which is a partial commutation of weekly payments, does not change its character of compensation for loss of income. Effectively, the payment is an advance of future weekly payments. Consequently, it continues to be assessable under subsection 25(1) [now subsection 6-5(2) of the ITAA 1997].
Although TD 93/3 considers partial commutation of periodic payments, the same principle can be applied where there is a total commutation of periodic payments.
In your case you have an accepted claim for a lump sum payment which will be calculated under section 30 of the Safety, Rehabilitation and Compensation Act 1988.
Therefore, the lump sum commutation payment you received to replace a weekly income is assessable income and should be included in your tax return in the year you received it.
As the lump sum payment is ordinary income and therefore assessable capital gains tax does not apply to the payment.
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