Edited version of private ruling

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Ruling

Subject: the assessability of workers compensation

Questions and Answers

1. Will the compensation amount or any portion thereof to be paid pursuant to the Workers Rehabilitation and Compensation Act (Northern Territory) (WRCA) (formerly the Work Health Act, Northern Territory) be included in your assessable income?

No.

2. Will any capital gain arising from the compensation amount be disregarded?

Yes.

Year(s) of income or period to which this ruling applies:

Year ended 30 June 2011

Commencement date of scheme:

1 July 2010

Relevant facts and circumstances

You sustained compensable disabilities said to have arisen from your employment with your employer (the Employer).

You have indicated a willingness to accept an offer of a 'once and for all' payment which would extinguish any future liability the Employer has in respect of payments to you for future loss of earning capacity, permanent impairment and any and all entitlements to compensation pursuant to the Act, including, but not limited to sections 64, 65, 71, 72, 73, 76, 77 and 78 of the WRCA in respect of the injury and the claim.

You wish to know if the payment is considered to be assessable income.

Relevant provisions:

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-30.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Section 82-135.

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 provides that your assessable income includes income according to ordinary concepts. It does not operate to include in a taxpayer's assessable income amounts of a capital nature.

The compensation amount is to be paid under the WRCA. The money to be received will be in satisfaction of giving up your rights to any future entitlements to compensation, pursuant to the Act, for loss of earning capacity, permanent impairment and, any and all entitlements to compensation pursuant to the Act, including, but not limited to sections 64, 65, 71, 72, 73, 76, 77 and 78 of the WRCA in respect of the injury and the claim.

These are rights of a capital nature and the money to be received to compensate you for their relinquishment will similarly be of a capital nature. The Commissioner's present view with respect to this matter can be found in paragraph 5 of Taxation Determination TD 93/3. This paragraph provides that lump sum payments received as redemption of all the injured worker's rights are of a capital nature and so are not included in assessable income.

Accordingly, section 6-5 of the ITAA 1997 will not apply to the compensation amount.

Section 15-30 of the ITAA 1997
Section 15-30 of the ITAA 1997 operates to include in a taxpayer's assessable income an amount received as insurance or indemnity for loss of an amount if the loss amount would have been included in assessable income and the amount received is not assessable as ordinary income under section 6-5.

The compensation amount does not meet this description as it is not paid for loss of earnings but in satisfaction of the giving up of capital rights.
Accordingly, section 15-30 of the ITAA 1997 will not apply to the compensation amount.

Section 82-130 of the ITAA 1997

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· payments for unused annual leave or unused long service leave;

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

· reasonable capital payments for personal injury.

Paid as a consequence of the termination of your employment

If the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In this case, you are considering entering into an agreement (the Agreement) in which you would accept one lump sum payment under the WRCA. In entering the agreement you would relinquish your entitlement to payment for future loss of income earning capacity, permanent impairment and any and all entitlements to compensation pursuant to the WRCA, including, but not limited to sections 64, 65, 71,72, 73, 76, 77 and 78 of the WRCA in respect of the injury and the claim. In addition, as stated in the Agreement, you would agree to undertake to resign from your employment.

As your resignation from your employment is a condition set out in the Agreement it is considered that the lump sum payment will not be paid unless you undertake to resign from your employment. Although the dominant cause of the payment will be the redemption of your employer's liabilities to make weekly payments of income maintenance and medical expenses, the fact that the termination of your employment is required in order to receive the payment means there is still a causal connection between the termination and the payment. The redemption of your employer's liabilities, the termination and the lump sum payment are all intertwined and connected.

It is considered that the payment will be made in consequence of the termination of your employment. Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The payment is received no later than 12 months after termination

The second condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of your termination of employment, unless you are covered by a determination exempting you from the 12 month rule.

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Exclusions under section 82-135 of the ITAA 1997

Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave and the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as certain other payments.

In your case, consideration must be given as to whether some or all of the payment is covered by the specific exemption in subsection 82-135(i) of the ITAA 1997.

This subsection states that employment termination payments do not include:

(i) a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936);

This exclusion is for a payment or benefit that compensates or reimburses the taxpayer for or in respect of the particular injury.

For an amount to meet the definition of consideration in paragraph (i) of the definition of employment termination payment, the payment must be for personal injury and be calculated by reference to the nature and extent of the injury or likely loss to the employee.

The criteria in subsection 82-135(i) is satisfied and the payment is excluded from being an employment termination payment.

Section 118-37 of the ITAA 1997

Taxation Ruling TR 95/35 indicates that settlement of a personal injuries claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the losses arising from the injury suffered.

The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(a) of the ITAA 1997 disregards payments or receipts for the purposes of CGT where the amount relates to compensation or damages a taxpayer received for any wrong, injury or illness a taxpayer suffers in their occupation.

The amounts meet this description. Section 118-37 of the ITAA 1997 will apply to the compensation amount so that any capital gain or capital loss you make will be disregarded.