Edited version of private advice

Authorisation Number: 1052103943051

Date of advice: 5 April 2023

Ruling

Subject: Lump sum compensation payments

Question 1: Will any amount paid to you pursuant to section 53 of the Return to Work Act 2014 (X) (X(X)) be included in your assessable income?

Answer:

Yes.

Question 2:

Will any amount paid to you pursuant to section 54 of the X (X) be included in your assessable income?

Answer:

No.

Question 3:

Will any amount paid to you in relation to retraining costs be included in your assessable income?

Answer:

No.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

You were an employee of Company A and had sustained injuries in your workplace.

You received weekly payments of income maintenance and were entitled to receive payments in relation to your medical expenses.

Your employer offered to make a payment to you in relation to the redemption of the weekly payments and your medical expenses and you entered into negotiations with them.

You entered into an agreement with Company A in relation to the redemption of your weekly payments and medical expenses under sections 53 and 54 of the Return to Work Act 2014 (X) (X(X)) summarised as follows:

•                     Company A's undischarged liability to make weekly payments of income support pursuant to section 39 and/or supplementary income support payments pursuant to section 40 of the X (X) from the date of the Agreement would be redeemed by the payment of a specified amount; and

•                     Company A's undischarged liability for medical and other expenses, including retraining costs, incurred by you from the date of the Agreement would be redeemed by the payment of a specified amount.

You received a payment in accordance with the Agreement.

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 section 118-37

Reasons for decision

Assessable income

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

In your case you received a dissected remediation settlement under the Agreement with amounts being paid pursuant to sections 53 and 54 of the X (X) which are considered below.

Section 53 of the X (X)

A lump sum payment representing redemption of future weekly payment is also regarded as assessable income.

The fact that the payment is received in one lump sum does not change its revenue character. This is consistent with the approach taken by the Commissioner in Taxation Determination TD 93/3 Income tax: is a payment, being a partial commutation of weekly compensation payments, assessable income? As outlined in paragraph 4 of TD 93/3, such a commutation would result in the lump sum remaining assessable, as its effect was simply to pay in advance the future weekly payments.

The assessability of redemption payments under the X (X) has been considered by the Commissioner in Taxation Determination TD 2016/18 Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (X) assessable income of the worker? which states the following:

11.          Section 53 concerns the redemption of a liability to make weekly payments under Division 4.

14.          A redemption payment received by a worker under section 53 is considered to be ordinary income, included in the worker's assessable income under section 6-5 of the ITAA 1997 in the income year in which it is received.

Application to your situation

Company A had undischarged liabilities to make income payments to you under Part 4 of the X (X) due to the injuries you had experienced during your employment.

A portion of the payment you received under the Agreement was paid to redeem those liabilities pursuant to section 53 of the X (X).

Therefore, in accordance with the principles contained in TD 2016/18 any portion of the payment you received that relates to the payment of an amount under section 53 of the X (X) will be ordinary income under section 6-5 of the ITAA 1997.

Section 54 of the X (X) and retraining costs

The Commissioner has considered the taxation treatment of amounts paid under section 54 for medical expenses and training allowances in the fact sheet 'South Australian Return to Work Act 2014 - lump sum payments' (the Fact sheet) which also considers payments for training expenses.

The Fact sheet outlines that the following amounts are not taxable and do not need to be shown in your tax return:

•                     Retraining allowance - a lump sum contribution towards your retraining expenses made to you to assist with your training or retraining for suitable employment; and

•                     Section 54 redemption payments for liabilities associated with medical expenses, which is a capital payment made to redeem your employer's liability to compensate you for medical expenses.

Application to your situation

Company A had undischarged liabilities to pay you compensation for medical and other expenses as referred to in Section 33 of the X (X), including retraining costs.

A portion of the payment you received under the Agreement was paid to redeem those liabilities pursuant to section 54 of the X (X) in relation to medical expenses and also for retraining costs.

As outlined above, any amount of the payment that is attributable to either section 54 of the X (X) or the retraining costs is not taxable.

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