| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051308431306
Date of advice: 27 February 2018
Ruling
Subject: Pay As You Go Withholding
Question 1
Are you required to withhold an amount under section 12-120 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from a redemption payment made to a worker under a workers’ compensation scheme?
Answer
Yes
This ruling applies for the following period
Financial year ending 30 June 2018
Financial year ending 30 June 2019
The scheme commences on
The date of this ruling
Relevant facts and circumstances
You run a workers’ compensation scheme.
Where a worker suffers a work injury preventing them from work (fully or in part), their wage income is supplemented or replaced by weekly payments from you to compensate for this lost income.
Where a worker is eligible to receive weekly payments, a redemption payment may be made by you in limited circumstances under your governing legislation to discharge your liability to continue making the weekly payments.
The governing legislation also contains a formula for calculating the redemption payment.
Relevant legislative provisions
Taxation Administration Act 1953 Section 12-120
Reasons for decision
Requirement to withhold an amount from Redemption Payments
Section 12-120 of Schedule 1 to the Taxation Administration Act 1953 (TAA) requires an entity to withhold an amount from a payment of compensation, or of sickness or accident pay it makes to an individual if the payment is:
(a) made because of that individual’s incapacity to work;
(b) calculated at a periodical rate, and
(c) not a payment made under an insurance policy to the policy owner.
An amount is required to be withheld from a redemption payment made under your governing legislation.
As discussed below, weekly payments are made to compensate a worker for income lost because of their inability to work due to a work injury. Being weekly payments, they meet the requirements of being calculated at a periodical rate. They are not payments made under an insurance policy to the policy owner.
A redemption payment is made to discharge the liability to pay a worker their ongoing weekly payments and is calculated with reference to a notional remainder of their periodical entitlements.
Weekly payments made under your governing legislation
Taxation Determination TD 2016/18 considers the tax consequences of receiving a redemption payment under State A worker’s compensation program (Return to Work Act 2014 (X) (RWA)).
Broadly, TD 2016/18 found a redemption payment made under the RWA to redeem a liability to make future weekly income replacement payments was ordinary income. The character of the redemption payment followed that of the weekly payments: as the relevant weekly payments were income replacement in nature, they were ordinary income.
These rules in your governing legislation generally align with those discussed in TD 2016/18. That is, where a worker suffers a work injury preventing them from work (fully or in part), their wage income is supplemented or replaced by weekly payments.
Weekly income supplement or replacement payments made under your governing legislation are considered ordinary income of the worker. While a work injury enlivens the worker’s entitlement to weekly payments, these payments are not in respect of the nature or extent of the injury. Rather they are payable on a recurrent basis and are directly referable to the worker’s income by supplementing or replacing any ongoing income lost during the workers inability to fully or partly undertake their work.
Redemption Payments
Similar to the RWA, a worker may have their weekly payments redeemed in certain circumstances under your governing legislation.
The amount of a redemption payment is calculated under your governing legislation. A worker may redeem their entitlement to weekly payments as a lump sum where the conditions of the legislation are met. The amount of the redemption payment is directly associated to the payment to the remainder of the worker’s entitlement to weekly payments.
Undissected lump sum
A redemption amount is considered to be assessable as ordinary income, whether or not it is paid as part of a larger lump sum.
Paragraphs 30-32 of TD 2016/18 discuss the characterisation of the redemption payment in the context of it being paid by way of a lump sum.
A payment may be characterised as wholly capital where it represents an entire sum paid to compromise a number of claims, only some of which relate to assessable income.
However redemption payments made under your governing legislation do not require dissection because the payment is wholly of an income nature. This amount is payable under statutory provisions which contemplate its separate identification
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
