Edited version of private ruling

Authorisation Number: 1011725502919

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Ruling

Subject: Assessability of repaid workers compensation payments

Question 1

Are the weekly payments you received from a state Workcover Authority included in your assessable income?

Answer

Yes.

Question 2

Are you entitled to a refund of the tax paid in respect of the weekly payments you received from a state Workcover Authority?

Answer

No.

This ruling applies for the following period:

1 July 2002 to 30 June 2010.

The scheme commenced on:

1 July 2002.

Relevant facts:

You were injured in a work related accident.

You received workers compensation payments for several years.

You declared those payments as income in your tax returns for the years ending
30 June XXXX to 30 June XXXX inclusive.

You were periodically attended Court to ensure the payments continued.

The payments were paid to you by a state Workcover Authority.

You were deemed unfit for work.

You accepted a lump sum settlement from which the total of the periodic workers compensation payments made to you were deducted and repaid to the state Workcover Authority.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 59-30.

Reasons for decision

Assessable income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes the ordinary income they derive directly or indirectly from all sources, whether in or out of Australia, during an income year.

Ordinary income is defined in subsection 6-5(1) of the ITAA 1997 to mean income according to ordinary concepts. While there is no guidance in the legislation on what is meant by 'income according to ordinary concepts', the courts have previously identified a number of factors which indicate an amount has the character of 'income according to ordinary concepts'. These include amounts that are:

· earned,

· expected,

· relied upon, and

· have an element of periodicity, recurrence or regularity.

Not all of these characteristics need to be present for a receipt to be considered ordinary income.

In your case, you received workers compensation payments from a state Workcover Authority. You did not earn these payments but they were paid to you as a result of a workplace accident and were your main source of income during that time. As your main source of income, it can be said you relied on the payments.

Your reliance on the payments is further supported by the fact that you periodically attended court to ensure the payments continued. As a result, it can be said that as well as relying on the payments, you expected to receive them.

Because you received the payments over a period of several years, the payments can also be said to have been periodic, recurring and regular.

Considering the above, we can see that the workers compensation payments you received from the state Workcover Authority had the character of ordinary income. However, to be assessable under the provisions of section 6-5 of the ITAA 1997, the payments must have been 'derived' by you as ordinary income.

Taxation Determination TD 2008/9 notes that there is longstanding judicial support for the proposition that a workers compensation amount cannot be 'derived' as ordinary income if the recipient is not beneficially entitled to the amount.

The question then remains, were you beneficially entitled to the amounts paid to you by the state Workcover Authority?

In your case, you attended court on various occasions to ensure the payments continued. As a result, it is clear that there was a legal obligation on the state Workcover Authority to make the workers compensation payments to you, and that you were legally entitled to receive those payments. In these circumstances there is no doubt you were beneficially entitled to the workers compensation payments and therefore derived those amounts as ordinary income.

Your situation in this regard is in direct contrast to that considered by the courts in Reiter v. Commissioner of Taxation (2001) 113 FCR 492; 2001 ATC 4502; (2001) 47 ATR 533 (Reiter's case).

In Reiter's case, the taxpayer challenged the Commissioner's position that workers compensation payments which were later repaid had been derived by the taxpayer as amounts of ordinary income. The Federal Court ruled in favour of the taxpayer on the basis that the taxpayer was not legally entitled to receive the payments because there was no legal obligation on the relevant Workcover authority to pay the amounts to the taxpayer. As a result, the taxpayer was not beneficially entitled to the amounts in question therefore did not derive them as ordinary income.

Repayment of amounts declared as assessable income

Where there has been a repayment of amounts previously declared as assessable income, the provisions of section 59-30 of the ITAA 1997 must be considered to determine whether or not any relevant income tax assessments can be amended.

To this end, section 59-30 of the ITAA 1997 provides that amounts that were previously treated as assessable income and which must be repaid are not assessable income. However, subsection 59-30(3) of the ITAA 1997 specifies this does not apply to taxpayers who must repay an amount because they received a lump sum as compensation or damages for a wrong or injury suffered in their occupation.

The courts have considered the application of section 59-30 of the ITAA 1997 in respect of whether or not repaid amounts of workers compensation should give rise to amended income tax assessments and refunds of tax.

In Rayner v. FC of T 98 ATC 2310; (1998) 40 ATR 1084 (Rayner's case), the taxpayer was seeking an amended assessment for a refund of tax after periodic workers compensation amounts he received were refunded to the payer from a lump sum eventually awarded to the taxpayer.

It was found in Rayner's case that the periodic workers compensation payments were rightly assessed as ordinary income, that the subsequent repayment of the amounts had no tax consequences, and that no amendment was warranted, either legally or morally. The taxpayer was denied his request to amend his assessment.

It is noteworthy that the taxpayer's submission in Rayner's case overlooked the fact that he had really received the value of the compensation payments twice: firstly, when he received the workers compensation payments and included them in his assessable income; and secondly, when he received the damages from which the workers compensation amounts previously received were repaid to the relevant authority.

We consider the circumstances of your case to be the same to those in Rayner's case and that subsection 59-30(3) of the ITAA 1997 applies to prevent you from amending your income tax assessments for the relevant income tax years.

In your case, you received regular workers compensation payments over a number of years after suffering an injury at work. You declared those payments as assessable income and they were correctly assessed as such. You settled your claim and received a lump sum amount which was a net amount after the value of the periodic payments made to you were deducted and repaid to the state Workcover Authority from the gross settlement amount.

Conclusion

The periodic workers compensation payments you received from the state Workcover Authority were derived by you as amounts of ordinary income and were correctly included in your assessable income for the years ending 30 June XXXX to 30 June XXXX inclusive.

Under the provisions of subsection 59-30(3) of the ITAA 1997, you are not entitled to amend your income tax assessments to remove those amounts from your assessable income for the years ending 30 June XXXX to 30 June XXXX inclusive.