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Ruling

Subject : Assessable Income

Question

Are the fortnightly incapacity payments you receive from the Department of Defence assessable?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You were a member of the Australian Defence Force (ADF).

While you were a member of the ADF, you suffered a work related injury. The injury was not sustained through warlike service.

Your services were no longer required and you were discharged from the ADF.

You made a compensation claim through the Department of Defence after leaving the ADF. Your claim was accepted.

You receive fortnightly incapacity payments from the Department of Defence. These payments are paid under section 19(3) of the Safety, Rehabilitation and Compensation Act 1988 (SRCA).

The Department of Veteran's Affairs (DVA) administers the SRCA.

Incapacity payments are payments for economic loss due to the inability to work because of an injury or disease that has been accepted as service related under the SRCA.

The payments you receive are based on a formula using your salary at rank and pay group at the time of your discharge from the ADF, adjusted annually in accordance with wage price indexation.

Income tax is currently being deducted from the fortnightly payments.

You have supplied documentation from the Department of Defence, and DVA in relation to your compensation claims and the legislation your payments are paid under.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision

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.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR1516).

In your case, you receive incapacity payments which are paid fortnightly from the Department of Defence. They are paid for economic loss due to your inability to work because of an injury that has been accepted as service related under the SRCA 1988.

These payments are based on your salary at rank and pay group at the time of your discharge from the ADF. The purpose of the payments is to provide income replacement and to compensate you for loss of earnings due to the effects of a service-related injury.

The payments therefore have an element of periodicity, recurrence or regularity and, as such, they retain the characteristics of ordinary income and are fully assessable when received according to section 6-5 of the ITAA 1997.

The incapacity payments will need to be included in your 2010-11 income tax return at income question 1 Salary or wages.