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Edited version of private ruling
Authorisation Number: 3011621392628
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Ruling
Subject: Assessability of lump sum commutation of weekly income maintenance payments
Will the lump sum you receive for the commutation of weekly income maintenance payments be included in your assessable income.
Yes.
This ruling applies for the following period:
1 July 2010 to 30 June 2011.
The scheme commenced on:
1 July 2010.
Relevant facts:
You are in receipt of weekly income maintenance payments.
You have elected to commute your future entitlement to these income maintenance payments to a lump sum.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5.
Reasons for decision
Income general
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. It does not operate to include in a taxpayer's income amounts that are capital in nature.
Characteristics of income that have evolved from case law include receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity.
Salary and wages are an example of ordinary income.
Assessability of compensation payments that are a substitute for income
The courts have previously held that:
· a compensation amount generally bears the character of that which it is designed to replace (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443; (1952) 10 ATD 82), and
· compensation payments which are a substitute for income are income according to ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).
In your case, the weekly income maintenance payments you receive are paid as a substitute for lost income. As such, those payments are assessable as ordinary income under the provisions of section 6-5 of the ITAA 1997.
Taxation consequences of commuting periodic income payments to a lump sum
The issue of whether the commutation of an entitlement to periodic payments to a lump sum affects assessability for taxation purposes was considered in Coward v. FC of T 99 ATC 2166; (1999) 41 ATR 1138. In that case Mathews J:
· found that payments made to replace income take on the character of the payment they replace and that the method of payment does not alter the character of the payment, and
· held that as the weekly compensation payments made to the appellant until he turned 65 were paid for loss of earnings and thus constituted income, a lump sum representing a commutation of those future weekly payments was also income.
This is consistent with the approach taken by the Australian Taxation Office in Taxation Determination TD 93/3 which deals with the partial commutation of periodic payments to a lump sum and which states in paragraph 4:
The weekly payments are 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 to income, etc (FC of T v. Inkster 89 ATC 5142; 20 ATR 1516). We consider that a lump sum payment, which is a partial commutation of weekly payments, does not change its character of compensation for loss of income. Effectively, the payment is an advance of future weekly payments. Consequently, it continues to be assessable.
In your case, you have elected to commute to a lump sum your future entitlements to assessable income maintenance payments. The lump sum will be assessable as ordinary income under the provisions of section 6-5 of the ITAA 1997.
Conclusion
The lump sum amount you will receive is ordinary income and assessable under section 6-5 of the ITAA 1997.
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