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This edited version has been archived due to the length of time since original publication.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.

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Edited version of your written advice

Authorisation Number: 1051325714031

Date of advice: 10 January 2018

Ruling

Subject: Assessability of your lump sum compensation payment

Question

Is the lump sum payment you received pursuant to section 56 of the Return to Work Act 2014 (State A) (RWA) assessable as either ordinary income or as a capital gain?

Answer

No.

Question

Is the lump sum payment you received pursuant to section 58 of the RWA assessable as either ordinary income or as a capital gain?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2018

The scheme commences on

1 July 2017

Relevant facts and circumstances

You suffered multiple work injuries over an extended period of time.

You made claims for compensation pursuant to the RWA, which have all been accepted.

You were found to be entitled to compensation for non-economic loss pursuant to section 58 of the RWA.

You were found to be entitled to compensation for economic loss of future earning capacity pursuant to section 56 of the RWA.

The employer is a self-insured employer within the meaning of the RWA.

Relevant legislative provisions

Income Tax Assessment Act section 6-5

Income Tax Assessment Act section 6-10

Income Tax Assessment Act section 104-25

Income Tax Assessment Act subparagraph 118-37(1)(a)(i)

Reasons for decision

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an County A resident includes ordinary and statutory income (for example, capital gains) derived directly and indirectly from all sources, whether in or out of County A during the income year

The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies its likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income, as are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts.

Section 56 of the RWA entitles a worker to compensation for economic loss of future earning capacity. Such amounts do not have the character of ordinary income. They are based on a sum prescribed by statute which bears no relationship to the employee's current or former earnings. In contrast, the calculation of weekly payments according to the worker's past and current earnings indicates that they reflect an actual loss of income as opposed to a loss of income earning capacity.

Section 58 of the RWA entitles a worker to compensation for non-economic loss by way of a lump sum. The amount received is calculated as a proportion of the prescribed sum for the degree of WPI caused by the work injury.

Non-economic loss is defined in the RWA as:

In your case, your lump sum payments are bearing none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity, and nor is it paid to compensate for loss of income.

Therefore, the lump sums are capital in nature and will not be assessable as ordinary income.

Statutory income

The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation.

In your case, the lump sum payment has been received as compensation for a ‘wrong or injury you have suffered in your occupation’, being the loss of body functionality in respect of your workplace injury/injuries.

Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118 37(1)(a)(i) of the ITAA 1997 and the payment will not be assessable as statutory income.

As the lump sum payments pursuant to sections 56 and 58 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.

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