Edited version of your written advice

Authorisation Number: 1012748166318

Ruling

Subject: Compensation

Questions and answers

1. Will the amount or any portion thereof to be paid in regard to the redemption of medical expenses pursuant to sections 32 and 42 of the Workers Rehabilitation and Compensation Act 1986, be included in your assessable income?

No.

2. Will the amount or any portion thereof to be paid in regard to the costs of vocational training pursuant to section 26 of the Workers Rehabilitation and Compensation Act 1986, be included in your assessable income?

No.

3. Will the amount paid in regard to the arrears of income maintenance be included in your assessable income?

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You sustained compensable disabilities said to have arisen from your employment.

You will receive a redemption offer in relation to medical expenses pursuant to sections 32 and 42 of the Workers Rehabilitation and Compensation Act 1986 (WRCA).

You will also receive a lump sum payment towards the costs of future vocational training.

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 15-30

Income Tax Assessment Act 1997 Section 118-37

Reasons for decision

The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia (sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Ordinary income

Section 6-5 of the ITAA 1997 deals with receipts of ordinary income. It does not operate to include in assessable income amounts of a capital nature.

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 thatare earned, are expected, are relied upon or have an element of periodicity, recurrence or regularity.

Lump sum for redemption of medical expenses

You will receive a lump sum redemption amount pursuant to sections 32 and 42 of the WRCA and the amount received will be in satisfaction of giving up your rights to future medical expenses.

These are rights of a capital nature and the money you receive to compensate you for the relinquishment of these rights will similarly be of a capital nature.

Therefore, the payment will not be assessable as ordinary income.

Lump sum for future vocational training

Section 26 of the WRCA relates to rehabilitation programmes established or approved by the Workcover Corporation. Payments that may be made pursuant to section 26 include those to assist in the training and retraining of workers (subsection 26(3)(d)).

You will receive a lump sum payment towards the costs of a retraining course pursuant to section 26 of the WRCA and it is not considered that you will be giving up any capital rights to future payments by receiving this payment.

Although you may rely on this payment for your training needs, it is evident that the payment is not derived from your employment, is not earned by you, is not a substitute for income and will not recur in the future.

Therefore, the payment you receive will not be assessable as ordinary income.

Statutory income

Statutory income is included in assessable income by specific provisions in the income tax legislation (section 6-10 of the ITAA 1997).

Lump sum for redemption of medical expenses

Section 15-30 of the ITAA 1997 operates to include in assessable income:

any amount received by way of insurance or indemnity for the loss of an amount if:

(a) the loss amount would have been included in your assessable income; and

(b) the amount you receive is not assessable as ordinary income under section 6-5.

The lump sum redemption amount to be paid under sections 32 and 42 of the WRCA does not meet this description as it will not be paid for loss of earnings but in satisfaction of the giving up of capital rights.

Therefore, the payment will not be assessable under section 15-30 of the ITAA 1997.

Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gains tax event 'relating directly .... to compensation or damages you receive for any wrong or injury you suffer in your occupation.'

The lump sum redemption amount for medical expenses to be paid under sections 32 and 42 of the WRCA meets this description.

Therefore, section 118-37 of the ITAA 1997 will apply to the lump sum redemption amount so that any capital gain or capital loss you make will be disregarded.

Lump sum for future vocational training

The lump sum amount paid under section 26 of the WRCA is not a compensation payment and will not be paid for loss of earnings.

Therefore, sections 15-30 and 118-37 of the ITAA 1997 will not apply to this payment.

Further, there are no other provisions in the income tax legislation that will operate to include this amount in your assessable income.

Lump sum for arrears of income maintenance

Payments for rendering personal services (such as earnings and salary and wages) are ordinary income and are included in assessable income under section 6-5 of the ITAA 1997.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted. Periodic workers compensation payments have been held by the courts to be ordinary income because they are received as compensation for loss of income or salary (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516).

When is a lump sum arrears of workers compensation benefits included in assessable income?

Under section 6-5 of the ITAA 1997, ordinary income is included in the assessable income of a taxpayer in the income year in which it is derived.

Taxation Ruling IT 2107 deals with social security sickness benefits and workers' compensation benefits. It states that social security sickness benefits constitute assessable income of recipients in the year paid, and that so too are periodic receipts of workers' compensation, including lump sum arrears of compensation (paid in respect of the period between the date of the event giving rise to the compensation and the date of payment of those arrears).

The issue of when a lump sum payment in arrears of periodic compensation is included in assessable income has been considered in a number of cases.

In Case G8 75 ATC 27, 19 CTBR (NS) Case 102, the taxpayer suffered an injury at work as a result of which she became entitled to compensation. During the 1971 income year she received payments under Employees' Compensation legislation, covering various periods from 12 December 1968. The taxpayer claimed that so much of the compensation paid to her as related to prior income years should be excluded from her assessable income for the 1971 income year. It was held that the payments were derived at the time they were received, and accordingly were assessable income in the 1971 income year.

In Vargiemezis v. FC of T [2008] AATA 1152, the taxpayer had been incapacitated in the course of his employment and subsequently obtained a court order for a lump sum representing arrears of weekly compensation from his employer. The taxpayer requested a prior year amendment to apportion the lump sum over the year in which it accrued. It was held that the lump sum arrears was assessable in the income year it was received, notwithstanding that part of the amount was referable to a prior year.

Your lump sum payment of arrears of income protection insurance disability benefits was derived at the time it was received. Accordingly, it is assessable income in the 2014-15 year of income (under section 6-5 of the ITAA 1997), and forms part of your taxable income for that income year.

Note:

Taxpayers who receive certain income in a lump sum payment containing an amount that accrued in earlier income years may be entitled to a lump sum payment in arrears tax offset (a tax offset reduces the amount of income tax you have to pay).

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