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Ruling
Subject: Assessability of compensation payment
Question and answer
Will the lump sum compensation amount you receive be included in your assessable income?
No.
This ruling applies for the following period
Year ended 30 June 2012.
The scheme commenced on
1 July 2011.
Relevant facts
You are entitled to receive a lump sum compensation amount pursuant to section 44 of the Workers Rehabilitation and Compensation Act 1986 (SA) (the WRCA).
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2).
Workers Rehabilitation and Compensation Act (1986) (SA) section 44
Reasons for decision
Income - general
A receipt is assessable income if:
o it is income in the ordinary sense of the word (ordinary income); or
o it is not ordinary income but through the operation of the legislation it is included in assessable income (statutory income).
Ordinary income
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Based on case law, it can be said that ordinary income generally includes receipts that:
o are earned
o are expected
o are relied upon, and
o have an element of periodicity, recurrence or regularity.
An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v Dixon (1952) 86 CLR 540).
Section 44 of the WRCA provides for weekly compensation payments to be payable to various specified dependents where a worker dies as a result of a compensable disability.
Subsection 44(14) of the WRCA provides that any weekly payments payable under section 44 can be commuted to a lump sum payment that is actuarially equivalent to the weekly payments.
Compensation payable under section 44 of the WRCA is for the loss of the deceased's financial support, it is not compensation payable for the loss of your income. Therefore the amount is capital in nature.
Where the compensation amount is paid by way of weekly payments, the regularity of the receipt of those weekly amounts means that they are income according to ordinary concepts when received.
In your case, you have reached a settlement with your deceased husband's employer for a lump sum amount in commutation for any entitlement you may have under section 44 of the WRCA. That amount is capital in nature and therefore not assessable as ordinary income under subsection 6-5(2) of the ITAA 1997.
Capital gains tax
The receipt of the lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under paragraph 118-37(1)(b) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong, injury or illness suffered by a person or a relative of that person.
In your case, the compensation received is for a 'wrong, injury or illness' you have suffered, being the death of a worker on whom you were dependent.
Therefore, any capital gain or capital loss arising from the CGT event is disregarded under paragraph 118-37(1)(b) of the ITAA 1997 as it relates wholly to compensating you for a personal wrong, injury or illness.
Conclusion
The lump sum amount of compensation received will not be included in your assessable income.