Edited version of private advice

Authorisation Number: 1051545056125

Date of advice: 12 August 2019

Ruling

Subject: Lump sum compensation payment paid pursuant to the Return to Work Act 2014 (South Australia)

Question 1

Will the amount or any portion thereof paid pursuant to section 53 of the RWA be included in my assessable income?

Answer

Yes.

Question 2

Will the amount or any portion thereof to be paid pursuant to sections 56 and 58 of the RWA be included in my assessable income?

Answer

No.

Question 3

Will the amount or any portion thereof paid pursuant to section 25 of the RWA be included in my assessable income?

Answer

No.

Question 4

Will the amount or any portion thereof paid pursuant to section 54 of the RWA be included in my assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

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 commenced employment in January 20xx.

You sustained an injury on in December 20xx.

You sustained another injury in February 20xx.

You made a claim for compensation pursuant to the RWA which was accepted.

In accordance with Part 2 Division 5 of the RWA you have been assessed as having x% whole person impairment (WPI).

As the injury resulted in you having a degree of permanent physical impairment, you were entitled to two lump sum payments pursuant to sections 56 and 58 of the RWA.

Section 56 of the RWA provides an entitlement to a lump sum payment for loss of future earning capacity for a worker (other than a seriously injured worker) who has been assessed as suffering a degree of WPI (between 5% and 29%) as a result of their work injury, subject to certain exceptions.

The lump sum is determined according to a formula set out in subsection 56(4) of the RWA. The calculation takes into account the prescribed sum that applies to the injured worker's degree of WPI, their age and the proportion of full-time work performed at the time of the injury.

Section 58 of the RWA provides an entitlement to a lump sum payment for noneconomic loss for a worker who has been assessed as suffering 5% or more WPI as a result of their work injury, subject to certain exceptions

Subsection 58(4) of the RWA states that the lump sum will be an amount that represents a portion of the prescribed sum calculated in accordance with the regulations.

Non-economic loss is defined in the RWA as:

·        pain and suffering

·        loss of amenities of life

·        loss of expectation of life

·        disfigurement

·        any other loss or detriment of non-economic nature

˗        You were offered $x in settlement of your entitlement pursuant to section 53 of the RWA.

˗        You were offered $x in settlement of your entitlement pursuant to sections 56 of the RWA.

˗        You were offered $x in settlement of your entitlement pursuant to sections 58 of the RWA.

˗        You were offered $x in settlement of your entitlement pursuant to section 25 of the RWA.

˗        You were offered $x in settlement of your entitlement pursuant to section of the RWA.

˗        As part of the agreement you resigned effective on and from January 20xx.

˗        You accepted the offer in March 20xx.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Section 15-30

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(i)

Detailed reasoning

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

Section 6-5 of the ITAA 1997: Ordinary income

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 53 of the RWA: Redemptions- Liabilities Associated With Weekly Payments

Taxation Determination TD 2016/18 "Income tax: is a redemption payment received by a worker under the RWA assessable income of the worker?" provides guidance and explains that payments made under section 53 of the RWA is ordinary income of the worker and is therefore assessable under section 6-5 of the ITAA 1997, in the income year in which it is received.

In your income tax return, you will need to include the amount that relates to the redemption of your entitlement to future weekly payments under section 53 of the RWA.

Section 6-10 of the ITAA 1997: Statutory Income

The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under Capital Gains Tax (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, portions of the lump sum payment you have 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.

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 payments will not be assessable as statutory income.

Section 56 and 58 of the RWA: Permanent impairment- economic and non-economic loss

In your case, you have received two amounts paid pursuant to sections 56 and 58 of the RWA as a result of being assessed as suffering a degree of permanent impairment (being whole person impairment) (WPI) from a physical injury sustained at work.

Paragraph 21 of TD 2016/18 provides guidance and explains that payments made under section 56 do not have the character of ordinary income as they are basedon a sum prescribed by statute which bears no relationship to the employee's current or formerearnings.

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. It is a one-off lump sum payment baring 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.

The amounts paid 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.

Section 25 of the RWA: Recovery and Return to Work Plans (Vehicle Modifications)

You have received a redemption amount pursuant to section 25 of the RWA and the amount received will be in satisfaction of giving up your rights to future expenses relating to recovery and retuning to work, specifically vehicle modifications.

These are rights of a capital nature and the money you received is to compensate you for the relinquishment of these rights will similarly be of a capital nature.

Therefore, the amount will not be assessable as ordinary or statutory income and you are not required to include the amount in your assessable income.

Section 54 of the RWA: Redemptions- Liabilities Associated with Medical Services

You have received a redemption amount pursuant to section 54 of the RWA and the amount received will be in satisfaction of giving up your rights to future medical and other expenses of the kind referred to in section 33, paragraph 54 of the RWA.

These are rights of a capital nature and the money you received is to compensate you for the relinquishment of these rights will similarly be of a capital nature.

Therefore, the amount will not be assessable as ordinary or statutory income and you are not required to include the amount in your assessable income.

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).