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Edited version of your private ruling
Authorisation Number: 1012477820523
Ruling
Subject: Lump sum compensation payment
Question
Is the lump sum payment you will be paid assessable in the financial year it is received?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
The scheme commences on
1 July 2011
Relevant facts and circumstances
You suffered a work place injury.
You made a claim for workers compensation, which was rejected.
You engaged a law firm to represent you.
The defendant has made an out of court settlement with a denial of liability.
They have agreed to pay you weekly compensation payments for an agreed period.
Work Cover's insurer has issued you with a claim number and advised you of the weekly payment amount which is 95% of your pre-injury average weekly earnings (PIAWE) amount.
You are currently in the process of providing supporting documentation in relation to your claim to the insurer.
You will be paid a lump sum payment in arrears.
The settlement finalises your claim for weekly payments and medical expenses.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 6-5(4)
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.
Workers compensation policies provide for periodic payments in the event of loss of income caused by a work-related injury or illness. These payments are assessable as income under section 6-5 ITAA 1997, as they are paid to take the place of lost earnings.
An amount received as a lump sum representing arrears of weekly compensation payments is classified as ordinary income and is assessable in the year received. This is the case even though the payment relates to earlier income years.
Derivation of income
As noted under section 6-5 of the ITAA 1997, ordinary income is assessable in the income year in which it is derived.
Taxation Ruling TR 98/1 deals with the derivation of ordinary income and states that the general rule with non-trading income is that it is derived when it is received.
Subsection 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it was derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.
In your case, the payment is for loss of earnings and subsequently will need to be included as part of your assessable income in the financial year in which it is received. We acknowledge the circumstances and associated tax liabilities. However, the Commissioner has no discretion to assess the payment in any other income year.
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