Edited version of private ruling

Authorisation Number: 1011765339321

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Ruling

Subject: 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 (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(s) to which this ruling applies:

Year ended 30 June 2011

Commencement date of scheme:

1 July 2010

Relevant facts:

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

You have indicated a willingness to accept an offer of a 'once and for all' payment of $11,500 which would extinguish any future liability the Employer has in respect of payments to you for future loss of earning capacity.

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 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 Workers Rehabilitation and Compensation Act (Northern Territory). 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.

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 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.