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Edited version of your private ruling
Authorisation Number: 1012618768548
Ruling
Subject: Lump sum payment under section 44 of the WRCA 1986
Question
Is the lump sum payment you received pursuant of section 44 of the Workers Rehabilitation and Compensation Act 1986 (South Australia) (WRCA) assessable as ordinary income or as a capital gain?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
You were entitled to receive weekly payments pursuant of section 44 of the WRCA.
Paragraph 44(1)(a) of the WRCA states:
(1) Subject to this Act, where a worker dies as a result of a compensable injury, compensation in the form of weekly payments is payable as follows:
(a) a dependent spouse or domestic partner is entitled to weekly payments equal to-
(i) in the case of total dependency-50%;
(ii) in the case of partial dependency-such lesser percentage as may be fixed by the Corporation having regard to the extent of the dependency, of the amount of the notional weekly earnings of the deceased worker;
You have elected to commute your entitlement to these weekly payments to a lump sum under subsection 44(14) of the WRAC.
Subsection 44(14) of the WRAC states:
A liability to make weekly payments under this section may, on application by the person entitled to the weekly payments, be commuted to a liability to make a capital payment that is actuarially equivalent to the weekly payments.
You have received a lump sum payment pursuant of section 44 of the WRCA
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 104-25.
Income Tax Assessment Act 1997 paragraph 118-37(1)(b)
Workers Rehabilitation and Compensation Act 1986 (South Australia)
Workers Rehabilitation and Compensation Act 1986 Section 44
Workers Rehabilitation and Compensation Act 1986 Paragraph 44(1)(a)
Workers Rehabilitation and Compensation Act 1986 Subsection 44(14)
Reasons for decision
Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary and statutory income (for example, capital gains) derived directly and indirectly from all sources, whether in or out of Australia during the income year
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).
Section 44 of the WRCA provides for weekly compensation payments to be payable to various specified dependents where a worker dies as a result of a compensable disability.
Subsection 44(14) of the WRCA provides that any weekly payments payable under section 44 can be commuted to a lump sum payment that is actuarially equivalent to the weekly payments.
Compensation payable under section 44 of the WRCA is for the loss of the deceased's financial support, it is not compensation payable for the loss of your income. Therefore the amount is capital in nature.
In your case, you have reached a settlement with the deceased's employer for a lump sum amount in commutation for any entitlement you may have under section 44 of the WRCA. That amount is capital in nature and therefore not assessable as ordinary income under section 6-5 of the ITAA 1997.
Statutory income
The receipt of the lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under paragraph 118 37(1)(b) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong, injury or illness suffered by a person or a relative of that person.
In your case, the compensation received is for a 'wrong, injury or illness' you have suffered, being the death of a worker on whom you were dependent.
Therefore, any capital gain or capital loss arising from the CGT event is disregarded under paragraph 118 37(1)(b) of the ITAA 1997 as it relates wholly to compensating you for a personal wrong, injury or illness.
As the compensation amount you have received under section 44 of the WRAC is not assessable as either ordinary or statutory income, you are not required to include the amount in your assessable income.
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