Edited version of your written advice

Authorisation Number: 1012985790123

Date of advice: 22 March 2016

Ruling

Subject: Compensation payment

Question and answer

Are you entitled to a refund of tax on the repayment of periodic workers compensation payments?

No.

This ruling applies for the following periods:

Year ending 30 June 2016

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You sustained a work place injury.

You received fortnightly workers compensation payments.

You have accepted a lump sum payment.

You are now required to repay the fortnightly workers compensation payments.

Relevant legislative provisions:

Income Tax Assessment Act 1997, Section 6-5

Income Tax Assessment Act 1997, Section 59-30

Income Tax Assessment Act 1997, Subsection 59-30(3)

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes the ordinary income they derive directly or indirectly from all sources, whether in or out of Australia, during an income year. Salaries and wages are considered, ordinary income.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443). Compensation payments that substitute for income have been held by the courts to be income under ordinary concepts ( FC of T v. Inkster (1989) 24 FCR 53; 89 ATC 5142; 20 ATR 1516; Tinkler v. FC of T 79 ATC 4641; 10 ATR 411).

The periodic fortnightly compensation payments that you received were a substitute for lost salaries and wages. As the compensation was a substitute for lost salary and wages they acquire the character of salaries and wages and therefore are considered ordinary income.

The payments are therefore assessable income and assessable under section 6-5 of the ITAA 1997 and are required to be declared in your tax return for the relevant income year.

Section 59-30 of the ITAA 1997 provides that some amounts that were previously treated as assessable income and which must be repaid are not assessable income. However, subsection 59-30(3) of the ITAA 1997 specifies this does not apply to taxpayers who must repay an amount because they received a lump sum as compensation or damages for a wrong or injury suffered in their occupation.

The courts have considered whether taxpayers are entitled to an amendment which would remove these amounts from their assessable income and also in some instances refunds of tax paid.

In Rayner v. FC of T 98 ATC 2310; (1998) 40 ATR 1084 (Rayner's case), the taxpayer was seeking an amended an assessment for a refund of tax after periodic workers compensation amounts he received were refunded to the payer from a lump sum eventually awarded to the taxpayer.

It was found in Rayner's case that the periodic workers compensation payments were rightly assessed as ordinary income, that the subsequent repayment of the amounts had no tax consequences, and that no amendment was warranted, either legally or morally. The taxpayer was denied his request to amend his assessment.

Accordingly, you are not entitled to a refund of tax withheld from the fortnightly periodic payments because section 59-30(3) of the ITAA 1997 does not apply to make the amounts not assessable. 

You have not asked the Commissioner to determine if the lump sum payment or any part of the payment is assessable, however what happens in these circumstances where a taxpayer is required to repay amounts already received, the tax office removes the repaid amount and only looks at the assessability of the remainder of the lump sum amount as tax has already been paid on the repaid amount.

For example if a taxpayer has received fortnightly amounts totalling $200,000.00 and then receives a lump sum payment of $1 million and they are required to repay the $200,000.00, the tax office when determining if the lump sum payment is assessable will remove the already received and taxed amount of $200,000.00 and will consider the assessability of the remaining $800,000.00.

As you can see from the example a taxpayer is not taxed twice on the same amount.

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