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Ruling
Subject: Assessability of compensation payment
Questions and answers:
1. Are the periodic workers compensation payments that you received assessable?
Yes.
2. Can you amend your assessments to exclude the amounts you were required to repay from your lump sum compensation payment?
No.
This ruling applies for the following period
Year ended 30 June 2005
Year ended 30 June 2006
Year ended 30 June 2007
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
The scheme commenced on
During 2005
Relevant facts
You sustained a work related injury.
As a result of the injury, over a number of years you received fortnightly compensation payments for periods that you were unable to work.
After a number of years you received a lump sum compensation payment.
You have been unable to obtain a dissection of the lump sum payment.
In the terms of judgement made by the court you were required to repay refundable periodic payments that you had received from prior years.
Relevant legislative provisions
Income Tax Assessment Act 1997, Section 6-5
Income Tax Assessment Act 1997, Section 59-30
Income Tax Assessment Act 1997, Subsection 59-30(3)
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes the ordinary income they derive directly or indirectly from all sources, whether in or out of Australia, during an income year. Salaries and wages are considered ordinary income.
An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443). Compensation payments that substitute for income have been held by the courts to be income under ordinary concepts ( FC of T v. Inkster (1989) 24 FCR 53; 89 ATC 5142; 20 ATR 1516; Tinkler v. FC of T 79 ATC 4641; 10 ATR 411).
From the information that you have provided the periodic compensation payments that you received were a substitute for lost salaries and wages when you were unable to work. As the compensation was a substitute for lost salary and wages they acquire the character of salaries and wages and therefore are considered ordinary
income.
Accordingly, the period compensation payments that you received are considered ordinary income and therefore are assessable under section 6-5 of the ITAA 1997.
Amendment of prior year assessments
Section 59-30 of the ITAA 1997 provides that some amounts 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.
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 an 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.
Your facts are simular to those found in Rayner's case. You are seeking to amend prior year assessments in order to exclude periodic workers compensation amounts that you received from your assessable income. These amounts were subsequently refunded from a lump sum which you were eventually awarded. Consistent with Rayner's case the periodic workers compensation payments were rightly assessed as ordinary income at the time they were received, the subsequent repayment of the amounts has no tax consequences, and therefore no amendment is warranted, either legally or morally.
Accordingly, you are not entitled to amend any prior year assessments to exclude the repaid amounts because section 59-30(3) of the ITAA 1997 does not apply to make the amounts not assessable.