Edited version of private advice

Authorisation Number: 1051676944830

Date of advice: 13 May 2020

Ruling

Subject: Assessable income

Question 1

Is the lump sum payment you received pursuant to sections 56 and 58 of the Return to Work Act 2014 (South Australia) (RWA) assessable as either ordinary income or as a capital gain?

Answer

No.

Question 2

Is the lump sum payment you received as a retraining allowance assessable as ordinary income?

Answer

No.

Question 3

Are the legal expenses you incurred deductable as per section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You sustained permanent impairment said to have arisen from your employment.

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

You incurred legal expenses.

You are entitled to a retraining allowance.

In accordance with Part 2 Division 5 section 22 of the RWA you have been assessed as having a % whole person impairment (WPI) for your injury sustained.

You will receive a lump sum compensation payment for economic loss pursuant to section 56 of the RWA for your injury sustained.

You will receive a lump sum compensation payment for non-economic loss pursuant to section 58 of the RWA.

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.

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 Australian resident 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

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.

In your case, you have received two lump sum payments 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) from a physical injury sustained at work.

Paragraph 21 of Taxation Determination TD 2016/18 Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (SA) assessable income of the worker, provides guidance on payments made under section 56 of the RWA and explains that lump sum payments made under section 56 do not have the character of ordinary income as they are based on a sum prescribed by statute which bears no relationship to the employee's current or former earnings.

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.

Therefore, both 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 payments have 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.

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.

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.

Retraining allowance

This portion of the lump sum is not a compensation payment and has not been paid for loss of earnings nor will it recur in the future.

The payment is a contribution towards a private expense and is not included in your assessable income.

Legal expenses

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of assessable income.

In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenses must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses.

If the advantage is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer.

As the payments you received as a result of your legal action are capital in nature, the expenses incurred in pursuing your claims are also capital in nature.

Consequently, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses you incurred, as expenditure of a capital nature is expressly excluded.

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