Edited version of your written advice

Authorisation Number: 1012764947100

Ruling

Subject: Compensation payments

Question

Can you exclude the amounts repaid to Work Cover from your assessable income?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 200X

Relevant facts

You received Work Cover payments after an accident at work. Tax was withheld from these payments.

You later received a tax free lump sum settlement payment. You were required to repay the Work Cover payments previously received in the relevant financial years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 59-30

Income Tax Assessment Act 1997 subsection 59-30(3)

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources whether in or out of Australia, during the income year.

Compensation payments received as compensation for loss of wages are fully assessable as ordinary income. The essential character and nature of such payments are of an income substitute (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82).

Section 59-30 of the ITAA 1997 provides that certain amounts that were previously treated as assessable income and that must be repaid are not assessable income.

However, subsection 59-30(3) of the ITAA 1997 states that this section does not apply to an amount you must repay because you received a lump sum as compensation or damages for a wrong or injury you suffered in your occupation.

In your case, you received a lump sum settlement payment as a result of a work accident.

Similar circumstances were found in Rayner v FC of T 98 ATC 2310. In this case, the taxpayer was injured at his place of work and received workers' compensation payments from the Workers' Compensation Board of Queensland, totalling $18,327. The payments were included in his assessable income for the 1995 tax year. The taxpayer subsequently sued his employer for damages relating to his injuries and received an amount of $25,000 in settlement. Of that amount, $18,327 was refunded to the Board. The taxpayer then requested an amended assessment for a refund of tax.

It was found that the subsequent repayment of the workers' compensation payments had no tax consequences and the periodic payments were rightly assessed when they were received. The taxpayer overlooked the fact that he really received $18,327 twice for his period of incapacity for work: the first when he received workers' compensation payments; the second when he received the damages. That is, the amount of damages calculated had been increased to take into account the fact that workers' compensation payments would have to be repaid out of the lump sum. He had to repay the Board out of the damages received as the workers' compensation legislation does not allow a taxpayer to keep two payments for incapacity for work for the same period in these circumstances. It was not true to say that the taxpayer had not had the benefit of the $18,327 which he received in the 1995 taxation year. He had the benefit of it and paid tax on the benefit when it was received. The taxpayer was denied his request to amend his 1995 assessment. No amendment of the assessment was warranted, legally or morally.

A similar decision was made in Case W78, 89 ATC 701. Mr G L McDonald, of the Administrative Appeals Tribunal stated at p 704:

Workers' compensation payments stand in the place of salary earned and are not subject to recoupment. The amount refunded pursuant to the workers' compensation legislation is refunded because the statute requires the defendant in the action to make the payment. If the workers' compensation legislation did not require the repayment to be made, the damages awarded to the plaintiff/applicant would be adjusted to take account of the weekly or fortnightly workers' compensation payments made to the date of judgement. That being the case, no obligation would arise requiring the applicant/plaintiff to repay any workers' compensation payments which he had earlier received.

Where a repayment of workers' compensation payments is required as a result of a taxpayer receiving a lump sum award of damages, the lump sum should have adequately compensated the taxpayer by including an equivalent amount as part of the damages awarded. Therefore, the taxpayer is not under-compensated by being required to make the repayment.

Your case is similar to the above. Your Work Cover payments were correctly assessed in the year they were received as the character of the payments was income.

You were further compensated when you received your lump sum payment. As a result, you were required to repay Work Cover.

In Fox v. Wood (1981) 148 CLR 438, the High Court held that in those cases where income previously received and taxed had to be repaid, the lump sum personal injury award includes an additional amount (the Fox v. Wood amount) to compensate for the tax that had been paid.

The repayment to Work Cover has placed you in the same financial position that you would have been had you only received the final compensation payment.

Because of this reason, the Commissioner of Taxation does not amend any prior year assessments to exclude the Work Cover amounts as there have been no anomalies arising out of taxation laws. 

Furthermore, subsection 59-30(3) of the ITAA 1997 is relevant in your circumstances and the Work Cover amounts cannot be excluded from your previous years assessable income. It follows that no associated refund of tax can be given.

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