Edited version of private advice

Authorisation Number: 1052002081021

Date of advice: 13 July 2022

Ruling

Subject: Workers compensation payments

Question

Are the amounts paid to you as Workers Compensation payments assessable?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

XX May 20XX

Relevant facts and circumstances

You went on stress leave as a result of a workplace bullying injury sustained at your workplace (XXXX) in Autumn 20XX.

Your Workers Compensation claim was accepted and as your General Practitioner (GP) ruled that you had no capacity to work, you were paid workers compensation payments through your employer (who was reimbursed by XXXX) until you left your employer in Summer 20XX.

Since then, XXXX has continued to pay you each week and have encouraged you to find work.

You commenced a new role at a different company in Autumn 20XX.

You worked there for X weeks but had to stop as workers compensation did not get a letter from your doctor stating that you were competent to work in the role.

The relevant government agency will now make a back payment of your full entitlements for workers compensation from the date in Summer 20XX until your GP sends a letter stating that you are competent to work in your new role.

All of the payments made to you have had Pay As You Go tax withheld.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

The courts have identified a number of factors which indicate whether an amount has the character of income according to ordinary concepts.

A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity (FCT v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82).

One or more of the following characteristics will combine with periodicity to give an amount an income nature:

•         it is made in substitution of income;

•         it is made to provide financial support, for example, as an income supplement; or

•         it is received in circumstances where the recipient has an expectation of receiving the payment on a regular basis so that the recipient is able to depend upon the payment for his or her regular expenditure.

Payments for rendering personal services, such as salary or wages, are ordinary income and are included in assessable income under section 6-5 of the ITAA 1997.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted. Compensation payments, such as workers compensation, which substitute income, have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142).

Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.

In your case the payment made to you was compensation intended to replace or substitute the wages you would have normally earned. Therefore, the payments you received are assessable under section 6-5 of the ITAA 1997 and are subject to PAYG withholding.

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