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Edited version of your written advice
Authorisation Number: 1051207201340
Date of advice: 30 March 2017
Ruling
Subject: Lump sum compensation payment
Question
Is any part of the lump sum payment you have been offered assessable as ordinary income or as a capital gain?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2017
The scheme commenced on
1 July 2016
Relevant facts and circumstances
You received a work place injury.
You had a medical evaluation on the degree and extent of permanent impairment in relation to claiming a lump sum under the Worker's Compensation and Injury Act 1981.
You have negotiated an acceptable lump sum payment from your state's worker's compensation insurer, which you will use to retrain, and for ongoing medical costs and medication.
You have received weekly workers compensation payments.
The lump sum you have been offered under sections 67 and 76 of the Worker's Compensation and Injury Act 1981 comprises of
(a) weekly payments of compensation: |
|
(ca) the worker having elected under section 31C of the Act by a form of election dated ---/---/---, compensation payable under the Act Schedule 2 Division 2A, in respect of an impairment mentioned in Schedule 2 item 51, representing 16.67% degree of permanent impairment from the injury, totalling: a lump sum. |
The Memorandum of Agreement offered to you by your former employer states:
In making an agreement for the purposes of section 67(1) of the Workers' Compensation and Injury Management Act 1981 (“the Act”) and upon that agreement being recorded under section 76 of the Act the following will apply:
(1) The worker will have no further entitlement to compensation under the Act for weekly payments arising out of the injury referred to in the agreement
(2) The worker will not have any other claim to redemption of weekly payments arising out of the injury referred to in the agreement.
(3) The worker will not have any further entitlement in respect of the injury referred to in the agreement (after the date the agreement is recorded) to payment of expenses under the Workers' Compensation and Injury Management Act 1981 Schedule 1 clauses 9, 17, 18, 18A or 19.
That is, in general terms, medical or surgical, dental, physiotherapy or chiropractic advice or treatment, first aid and ambulance expenses, medical requisites, charges for attendance and treatment by way of injury management, charges for hospital treatment and maintenance, cost of artificial aids and travelling expenses.
(4) The worker forfeits any entitlement he/she may have under the Act Part III to compensation for a permanent impairment from a compensable personal injury by accident referred to in the agreement.
(5) The worker forfeits any chance of a court awarding common law damages against the employer in respect of the injury referred to in the agreement (see section 93E(13) and section 93K(1) of the Act). That is, in general terms the worker forfeits any chance to recover civil damages from the employer.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(ii)
Income Tax Assessment Act 1997 Section 995-1.
Reasons for decision
Ordinary Income
Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).
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:
● are earned
● are expected
● are relied upon
● have an element of periodicity, recurrence or regularity.
The lump sum payment you have been offered is not income from rendering personal services, income from property or income from carrying on a business.
The payment is a one off payment and thus it does not have an element of recurrence or regularity.
The nature of a lump sum payment generally bears the character of that which it is designed to replace. If the lump sum payment is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.
Your payment is not a lump sum payment which substitutes for an income stream but rather for entering into an agreement with the employer for payments for incapacity resulting from an injury and for surrendering your rights under the Worker's Compensation and Injury Act 1981.
The lump sum payment is a capital receipt and is not ordinary income. Therefore the amount is not assessable under section 6-5 of the ITAA 1997.
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision called statutory income.
Capital gains tax (CGT)
Amounts received in respect of personal injury which are not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the CGT provisions of the ITAA 1997.
Receipt of a lump sum payment may give rise to a capital gain (statutory income). However, subparagraph 118-37(1)(a)(ii) of the ITAA 1997 entitles a taxpayer to disregard any capital gain or loss made from a capital gains tax event relating directly to compensation or damages received for any injury, illness or wrong the taxpayer suffers personally
Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.
When settling with a lump sum payment you surrender your rights, not only to recover any such benefits in the action, but also to claim any further benefits to which you might now or in the future have an entitlement under your policy.
As both your lump sum payments relate to your incapacity, any capital gain or loss will be disregarded.
Applying paragraph subparagraph 118-37(1)(a)(ii) of the ITAA 1997 to your circumstances, the lump sum payment would not be considered as an assessable capital gain.
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