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Edited version of private ruling
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Ruling
Subject: Repayment to Centrelink from compensation payment
Questions and answers:
Are you entitled to a loss for the amounts repaid to Centrelink?
No.
Are you entitled to amend your tax returns for the amount you repaid to Centrelink?
No.
This ruling applies for the following periods:
Year ended 30 June 2009.
Year ended 30 June 2010.
The scheme commenced on:
1 July 2008.
Relevant facts:
You had an injury at work.
You received Centrelink payments, these amounts were included in your assessable income on your income tax returns from 2008-2009 and 2009-2010.
You received a lump sum compensation payment.
You were advised you had to repay Centrelink.
The Centrelink payments were repaid from the lump sum injury compensation claim you received.
The insurance company repaid this amount before you received your net amount of compensation payment.
Assumptions:
N/A
Relevant legislative provisions:
Income Tax Assessment Act 1997 Subsection 6-5(2).
Income Tax Assessment Act 1997 Section 59-30.
Income Tax Assessment Act 1997 Subsection 59-30(3).
Reasons for decision
What is assessable income for taxable purposes?
Subsection 6-5(2) 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.
When do you have a tax loss?
You generally make a tax loss when the total deductions you can claim for an income year exceed the total of your assessable and net exempt income for the year.
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.
Section 59-30 of the ITAA 1997 provides that amount 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.
You have stated that your injury was work related and the resulting lump sum payment was to compensate you for this occupational injury. As such section 59-30(3) applies to you.
The courts have considered whether taxpayers are entitled to an amendment which would remove these amounts from their assessable income and also in some instances refunds of tax paid.
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.
When a taxpayer receives compensation from, for example Centrelink, and later receives further compensation for the same purpose such as to replace lost earnings while injured, e.g. in a lump sum they are in effect receiving the value of the compensation twice. The taxpayer will only pay tax once on the amount, when they first declared it in their assessable income.
Conclusion:
You are not entitled to an amendment to remove the Centrelink payments previously declared as assessable income as subsection 59-30(3) of the ITAA 1997 applies to you. These amounts were derived by you as ordinary income and were correctly included as part of your assessable income in the 2008-2009 and 2009-2010 years.