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Ruling

Subject: Workers' compensation - payments to dependants

Question 1

Is the lump sum dependant payment of that you received as a result of the death of your parent included in your assessable income?

Answer

No.

Question 2

Are the dependant benefits paid to you periodically as a result of the death of your parent included in your assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are a child under 18 years of age.

You are a resident of Australia for taxation purposes.

Your parent died as a result of a work incident.

Your late parent's employer lodged a claim with the relevant work cover authority because as a dependant, you were entitled to compensation for a fatal injury.

You were entitled to compensation pursuant to a certain section of the relevant workers' compensation legislation, because at the time of your parent's death you were partially dependent on your late parent's earnings.

The compensation payable to a dependant under that section is:

§ an amount that is reasonable and proportionate to the monetary value of the loss of dependence by the dependants

§ a weekly amount equal to a specified percentage of the amount of full-time adult persons ordinary time earnings as declared by the Australian Statistician in the report about average weekly earnings, while the dependant is under 16 or is a student (receiving full-time education) under 21.

You received the following payments from the relevant work cover authority:

§ a dependant lump sum payment

§ a dependant benefit (which is paid periodically).

The above payments were made into your own bank account, that is, an account in your own name.

The dependant benefit is paid to you periodically and will continue to be paid until you are 21 years of age, provided you are undertaking full-time studies.

The dependant benefit payments that are made periodically equate to a certain amount per week.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 4-10

Income Tax Assessment Act 1997 Section 4-15

Income Tax Assessment Act 1997 Subsection 6-1(1)

Income Tax Assessment Act 1997 Subsection 6-15(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Subsection 118-37(1)

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 Subsection 102AE(2)

Summary

The dependant periodic benefit is ordinary income, and so is assessable income and included in taxable income. However, the lump sum dependant payment is not ordinary income and is not statutory income. Consequently, the lump sum dependant payment is not assessable income so you do not have to pay income tax on it.

Detailed reasoning

Taxable income

Under section 4-10 of the Income Tax Assessment Act 1997 (ITAA 1997), income tax is worked out by reference to your taxable income for the income year. Taxable income is calculated by subtracting the deductions from the assessable income for the income year (section 4-15 of the ITAA 1997).

Assessable income

Subsection 6-1(1) of the ITAA 1997 states that assessable income consists of:

§ ordinary income

§ statutory income.

If an amount is not ordinary income and is not statutory income it is not assessable income, so you do not have to pay income tax on it (subsection 6-15(1) of the ITAA 1997).

Ordinary income

Ordinary income is income according to ordinary concepts (section 6-5 of the ITAA 1997).

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

The courts have identified a number of factors which indicate whether an amount has the character of income according to ordinary concepts. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity (FCT v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82).

One or more of the following characteristics will combine with periodicity to give an amount an income nature:

§ it is made in substitution of income

§ it is made to provide financial support, for example, as an income supplement

§ it is received in circumstances where the recipient has an expectation of receiving the payment on a regular basis so that the recipient is able to depend upon the payment for his or her regular expenditure.

In your case, you received a lump sum dependant payment and you receive a dependant benefit periodically. These payments are not for rendering personal services, income from property or from carrying on a business. Rather, they are compensation payments that were made as a result of the death of your parent.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted. Compensation payments which substitute income, or which are paid to replace lost earnings, have been held by the courts to be ordinary income. On the other hand, if the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

The dependant periodic benefit is paid regularly and is calculated by reference to average weekly earnings. It is made in substitution of income and to provide financial support because at the time of your parent's death you were partially dependent on their earnings. You have an expectation of receiving the benefit on a regular basis so that you are able to depend upon it for your regular expenditure. The dependant periodic benefit is therefore ordinary income, and so is included in assessable income under subsection 6-1(1) of the ITAA 1997.

On the other hand, the lump sum dependant payment was a one-off payment and so does not have an element of periodicity or regularity. It was paid as compensation for the loss of dependence, that is, the loss of your parent's support and the loss of your reliance on them.

Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation payment is assessable, and states that such a payment is assessable income:

§ if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined)

§ to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.

In your case, you received the lump sum dependant payment as compensation for the loss of your parent rather than for loss of an income nature. It was paid for the loss of a capital asset, so it is a capital receipt. Therefore, the lump sum dependant payment is not assessable as ordinary income.

However, it is also necessary to consider whether the lump sum dependant payment is statutory income.

Statutory income

Statutory income is not ordinary income, but is included in assessable income by specific provisions of the income tax law (section 6-10 of the ITAA 1997).

These specific provisions are listed in section 10-5 of the ITAA 1997. The list includes capital gains, which are included in assessable income by virtue of the capital gains tax (CGT) provisions.

Section 102-5 of the ITAA 1997 provides that assessable income includes any net capital gain (the total of capital gains for the income year, reduced by certain capital losses).

Taxation Ruling TR 95/35 considers the CGT consequences for a person who receives an amount as compensation. The ruling states that a right to seek compensation is an asset for the purposes of the CGT provisions, and that a right to seek compensation is:

§ acquired at the time of the compensable wrong or injury

§ disposed of when it is satisfied, surrendered, released or discharged.

However, subsection 118-37(1) of the ITAA 1997 disregards any capital gain or capital loss made where the amount relates to compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally.

In your case, subsection 118-37(1) of the ITAA 1997 applies. This means that the lump sum dependant payment that you received as a result of your parent's fatal injury is not included in your assessable income by virtue of the CGT provisions. Therefore, this compensation payment is not statutory income.

Conclusion

The dependant periodic benefit is ordinary income, and so is included in assessable income. However, the lump sum dependant payment that you received is not ordinary income and is not statutory income. Consequently, the lump sum dependant payment is not assessable income so you do not have to pay income tax on it (subsection 6-15(1) of the ITAA 1997).

It should be noted that under Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936), special higher rates of tax apply to certain income derived by prescribed persons who are under 18 years of age (referred to as minors).

However, subsection 102AE(2) of the ITAA 1936 sets out the limited circumstances in which certain forms of income are deemed to be 'excepted assessable income'. If income is excepted assessable income it is taxed at normal rates and the higher rates of tax under Division 6AA do not apply. Subsection 102AE(2) states that excepted assessable income includes the following:

§ employment income

§ income derived by the minor from the investment of any property transferred to the minor by way of a claim for damages in respect of:

o loss by the minor of parental support

o pursuant to any law relating to worker's compensation.

Taxation Determination TD 92/133 deals with the application of Division 6AA to weekly compensation payments made under workers' compensation legislation to a dependant child of a deceased employee (who died as a result of an accident). TD 92/133 states that the weekly compensation payments are considered to be employment income and so are excepted assessable income.

Your dependant periodic benefits are therefore excepted assessable income and are taxed at normal marginal rates of tax. That is, the special higher rates of tax set down in Division 6AA do not apply.