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Edited version of private ruling
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Ruling
Subject: Assessability of workers compensation
Question 1
Will the lump sum redemption amounts or any portion thereof to be paid pursuant to sections 42 and 32 of the Workers Rehabilitation and Compensation Act 1986 (SA) (WRCA), be included in your assessable income?
Answer
No.
Question 2
Will any capital gain arising from the lump sum redemption amounts be disregarded?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You sustained compensable disabilities said to have arisen from your employment.
As a result of these injuries, your are entitled to receive weekly income maintenance pursuant to Division 4 of the WRCA and medical and other expenses pursuant to section 32 of the WRCA.
You have indicated a willingness to accept two 'once and for all' payments which would extinguish any future rights you have to weekly income maintenance and medical expenses payments.
You have been recently diagnosed with a terminal disease.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 118-37.
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)
Section 6-5 of the ITAA 1997, deals with receipts of ordinary income. Ordinary income is not clearly defined in the legislation and therefore the courts have identified a number of factors that indicate whether an amount has the character of income according to ordinary concepts.
It has been determined that a frequent characteristic of income receipts is an element of periodicity, recurrence or regularity (Federal Commissioner of Taxation v. Dixon (1952) CLR 540; (1952) 10 ATD 82). Other characteristics of income that have evolved from case law also include receipts that:
· are earned
· are expected, and
· are relied upon.
These factors are not relevant in your case as you will receive a one-off lump sum payment. As a general rule, where a lump sum payment is received in substitution for the right to receive future weekly payments, the lump sum payment will take on the character of the payment that it replaces.
However, if other factors are taken into account in determining the appropriateness and amount of the lump sum payment, this may lead to a conclusion that the lump sum amount has taken on the character of a capital payment.
In your circumstances it is considered that the lump sum payment is not merely a straight conversion of your weekly payments and other factors were taken into consideration in deciding the amount of the lump sum payment to be made. These additional factors point to a conclusion that the lump sum in relation to the redemption of weekly payments is capital in nature.
A receipt in respect of future medical expenses lacks the characteristics of ordinary income.
Accordingly, the lump sum payment amounts will not be assessable as ordinary income under section 6-5 of the ITAA 1997.
Capital payments
An amount received under section 42 of the WRCA may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997 - about cancellation, surrender or similar endings).
Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gains tax event 'relating directly ... to compensation or damages you receive for any wrong or injury you suffer in your occupation.'
The lump sum redemption amounts to be paid under section 32 and 42 of the WRCA meet this description.
Section 118-37 of the ITAA 1997 will apply to the lump sum redemption amounts so that any capital gain or capital loss you make will be disregarded.