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Ruling

Subject: lump sum commutation payment

Question and answer:

Will the lump sum you receive for the commutation of weekly income maintenance payments 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 and circumstances:

You are in receipt of weekly income maintenance payments, paid to you under paragraph 44(1)(a) of the Workers Rehabilitation and Compensation Act 1986 (WRAC) as the spouse of a deceased worker.

Paragraph 44(1)(a) of the WRAC states:

Subject to this Act, where a worker dies as a result of a compensable disability, compensation in the form of weekly payments is payable as follows:

(a) a dependent spouse or domestic partner is entitled to weekly payments equal to-

(i) in the case of total dependency-50%;

(ii) in the case of partial dependency-such lesser percentage as may be fixed by the Corporation having regard to the extent of the dependency,

of the amount of the notional weekly earnings of the deceased worker;

You have elected to commute your future entitlement to these income maintenance payments to a lump sum under subsection 44(14) of the WRAC.

Subsection 44(14) of the WRAC states:

A liability to make weekly payments under this section may, on application by the person entitled to the weekly payments, be commuted to a liability to make a capital payment that is actuarially equivalent to the weekly payments.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 104-25.

Income Tax Assessment Act 1997 Section 118-37.

Workers Rehabilitation and Compensation Act (1986) (SA) Section 44.

Reasons for decision

Income - general

A receipt is assessable income if:

§ it is income in the ordinary sense of the word (ordinary income), or

§ 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:

§ are earned,

§ are expected,

§ are relied upon, and

§ 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.

However, when you elect to commute those weekly payments to a lump sum amount under subsection 44(14) of the WRCA, the lump sum amount has no characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity.

Therefore, the lump sum amount received will be capital in nature, being a payment for the loss of financial support, and will not be 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 capital gains tax (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.