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Edited version of your private ruling

Authorisation Number: 1012550573894

Ruling

Subject: Assessability of Workers Compensation Lump Sum Payment

Question

Is the redemption of weekly compensation payments as a lump sum under the Act assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You incurred a workplace injury.

The injury resulted in a decreased capacity to work.

You lodged a workers compensation claim with your employer.

You are entitled to receive weekly workers compensation benefit payments.

Your insurer under the Act at your request has proposed to make a lump sum payment offer to settle your workers compensation claim.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

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. 

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

The weekly compensation payments that you are entitled to receive, is income according to ordinary concepts as it will be paid to replace income to compensate for the loss of earnings as a result of a injury suffered at work.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; ATD 82). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411.

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. Federal Commissioner of Taxation 99 ATC 2166; (1999) 41 ATR 1138. In that case 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 redemption of those future weekly payments was also income.

This is consistent with the approach taken by the Commissioner of Taxation Determination TD 93/3 which deals with the partial commutation of periodic payments to a lump sum. As outlined in paragraph 4 of TD 93/3, such a commutation would result in the lump sum remaining assessable, as its effect was simply to pay in advance the future weekly payments.

At your request, you were offered a lump sum payment in full settlement of your worker's compensation claim. That is your future weekly payments being commuted to a lump sum. The lump sum is to be paid to substitute you for your loss of income which you otherwise would have earned. As the weekly income replacement payments were ordinary income, a lump sum payment also retains the character of being ordinary income.

Accordingly, the lump sum payment to be received under the Act for redemption of liability to make future weekly payments is assessable under section 6-5 of the ITAA 1997 in the income year in which you receive the payment.

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