Edited version of private advice

Authorisation Number: 1051788531116

Date of advice: 8 December 2020

Ruling

Subject: Lump sum compensation payment

Question 1

Is the lump sum payment for loss of future earning capacity or any portion thereof paid pursuant to your State workers compensation legislation assessable as either ordinary income or as a capital gain?

Answer

No.

Question 2

Is the lump sum payment for non-economic loss paid pursuant to your State workers compensation legislation assessable as either ordinary income or as a capital gain?

Answer

No.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You made a claim under State workers compensation legislation in relation to an injury you sustained whilst undertaking your employment duties.

You have received benefits under the scheme.

The claims agent requested that you attend a permanent impairment assessment.

It was confirmed in the report prepared by a certified medical practitioner that your injury had stabilised, and you were assessed as suffering a compensable degree of whole person impairment (WPI).

The claims agent advised you in writing, that based on the report prepared by the certified medical practitioner they had determined that you were entitled to lump sum payments for loss of future earning capacity and non-economic loss.

The loss of future earning capacity lump sum payment is determined according to a formula set out in the Act. 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.

The lump sum for non-economic loss is an amount that represents a portion of the prescribed sum calculated in accordance with the regulations.

Non-economic loss is defined in the State workers compensation legislation 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 accepted the claims agent's decision and have signed and returned the applicable signed documents.

The payments will be electronically transferred into your Solicitor's trust account in the 20XX-XX financial year.

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 104-25

Income Tax Assessment Act 1997 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 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 will receive lump sum payments pursuant to State workers compensation legislation as a result of being assessed as suffering a degree of permanent impairment (being whole person impairment) from a physical injury sustained at work.

The lump sum payment for loss of future earning capacity does not have the character of ordinary income as it is based on a sum prescribed by statute which bears no relationship to an employee's current or former earnings.

The payment for non-economic loss 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, the lump sum payments 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 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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