Edited version of private advice

Authorisation Number: 1052253757923

Date of advice: 23 May 2024

Ruling

Subject: Assessable income - compensation

Question

Is the compensation payment you received, assessable under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

From XX XX 20XX, you commenced employment with the XXX (your Employer).

You were employed as the XXXXXX.

On XX XX 20XX and XX XX 20XX through to XX XX 20XX, you supplied medical certificates to your Employer, confirming your absence from the workplace.

On XX XX 20XX, you received a letter from your Employer, requesting that you resign from your position, effective XX XX 20XX.

On XX XX 20XX, you served a Solicitor's letter on your Employer, arguing there was no adequate basis for the termination of your employment. In this letter, you offered to negotiate the terms of your departure from the Employer, claiming that you suffered ongoing impacts to your health because of workplace conditions.

On XX XX 20XX, your Employer's solicitor, settled a Separation Agreement with you, ending the employment arrangement effective XX XX 20XX.

You lodged a compensation claim with an insurer (the Insurer).

On XX XX 20XX, you received an email from the insurer, acknowledging lodgment of the compensation claim. The Insurer required you to consent to an interview and medical examinations with a doctor and psychologist as nominated by the Insurer.

You attended the relevant medical appointments with both the doctor and the psychologist.

On XX XX 20XX, you attended an interview with the Insurer. The Insurer were representing your Employer.

On XX XX 20XX, you filed a Statement of Claim (SoC) with the Magistrates' Court of STATE (the Court).

The SoC argues that you suffered injury arising out of or in the course of your employment. You claimed:

•         Weekly payments of compensation pursuant to section 93 of the Accident Compensation Act (the Act) from XX XX 20XX.

•         Medical and like expenses pursuant to section 99 of the Act.

•         Interest.

•         Costs.

On XX XX 20XX, the Court issued Consent Orders, with denial of liability by the Defendant (your Employer) and ordered that the Defendant will pay:

•         Weekly payments of compensation in accordance with the Workplace Injury Rehabilitation and Compensation Act 2013, from XX XX 20XX to XX XX 20XX.

•         The reasonable medical and like expenses from XX XX 20XX to XX XX 20XX.

The Court Orders, in relation to the weekly payments of compensation, provide that the payments are subject to:

•         The production of valid WorkCover medical certificates (or statutory declaration if necessary);

•         Centrelink clearance;

•         Income tax legislation.

The settlement and the dismissal of the proceedings are without prejudice to the rights of either party in relation to any impartment claim by you.

On XX XX 20XX, the Insurer advised in writing, that they had calculated your weekly payments. The Insurer informed you that the payment amount was for loss of income from being unable to work your normal job or hours because of a work-related injury or illness. The payments were calculated with reference to your Pre-Injury Average Weekly Earnings (PIAWE).

A gross amount of $XXX,XXX.XX was paid to you.

$XX,XXX.XX of income tax was deducted from the payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Question

Is the compensation payment you received, assessable under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The compensation amounts received pursuant to weekly payments are paid as a substitute for loss of income as a result of injury or illness and are assessable under subsection 6-5(2) of the ITAA 1997.

Detailed reasoning

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer, includes ordinary income derived directly or indirectly from all sources, during an income year.

The legislation does not provide a definition of 'ordinary income' therefore it is necessary to turn to case law in deciding whether the payment you received constitutes ordinary income.

Characteristics of 'ordinary income' that has evolved from case law include receipts that have the following characteristics:

•         An element of periodicity, recurrence or regularity.

•         The receipt is relied upon, and

•         The receipt is expected.

Generally, amounts paid to compensate for a loss generally acquires the character of that for which it is substituted. Therefore, periodical payments made as compensation or substitute for loss of income as a result of accident or injury is considered ordinary income (Federal Commissioner of Taxation v Inkster (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR 1516; Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411;).

Taxation Ruling IT 2424 - Income tax: compensation payments in respect of unlawful acts of discrimination states the ATO view relevant to your circumstances. Paragraph 8 explains that a compensation payment to make up for lost earnings or in substitution for income which would otherwise have been earned is in the nature of income and is liable to income tax in the hands of the employee.

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 courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142).

Taxation Determination TD 95/38 - Income tax: under what circumstances is the receipt of a lump sum compensation /settlement payment assessable? Provides that a compensation or settlement payment is included in assessable income if the payment relates to claims for loss of income only.

In your case, the fact you have suffered an injury, is not an indicator of the nature of the payment received. Based on the documented evidence provided in relation to your situation, the Court Orders have described the payments as being for lost earnings and subject to income tax legislation, for the one-year period from XX XX 20XX to XX XX 20XX. The letter from the Insurer advising of how the weekly payments are calculated, also states the payments are for loss of income.

Your contentions are that had the payment been paid in a lump sum, the gross compensation amount would not be assessable. Taxation Determination 93/3 - Income tax: is a payment, being a partial commutation of weekly compensation payments, assessable income? Explains at paragraph 4, that the weekly payments would be assessable income because they are paid as compensation for loss of income or salary, or because of their regular receipt and their nature as a supplement of income (FC of T v Inskter 89 ATC 5142; 20 ATR 1516). We consider that even if the payment was made in a lump sum, that this would not have changed the character of the payment, and it would continue to be assessable under section 6-5 of the ITAA 1997 (formerly subsection 25(1) of the Income Tax Assessment Act 1936).

The payments you received due to an injury you suffered, represent weekly amounts of income that would be considered to be income received if you were still working. Even if the receipts were not directly attributable to employment or services rendered, the expected regular periodical payments have the character of ordinary income. This is because the benefits are a replacement of employment income.

Payments of salary or wages, including payments made under an insurance policy that replaces salary or wages are income according to ordinary concepts and are included in your assessable income under subsection 6-5(2) if the ITAA 1997.

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