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Ruling

Subject: Assessability of workers compensation/personal superannuation contribution deduction

Questions and answers:

Should the total amount of workers compensation payments be included in your assessable income?

Yes.

Are you entitled to claim back the 15% tax paid by your superannuation fund after your claim for the contribution you made to your superannuation fund was disallowed?

No.

Are you entitled to claim a deduction for personal superannuation contributions (PSC) made in the 2010-11 financial year?

Yes.

Should you include amounts for lost salary or wages paid under a workers compensation scheme at Question 1 on your tax return?

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You suffered an injury while you were employed with your former employer.

For two years prior to your retirement you were paid a workers compensation wage substitution whilst you were on accident sick leave.

You retired from the workforce in the 2008-09 financial year and began using your super allocated pension.

The institution paying your compensation was advised that you had retired from full time employment.

Under the Workers Compensation Act you are entitled to receive a compensation payment for your injury until you are 64.5 years of age.

You have been assessed by a Workers Compensation Commission approved medical specialist for permanent impairment.

The specialist recommended that you would still receive your workers compensation fortnightly payments and the insurance company would continue to pay for your medical appointments, medicine and therapy.

The fortnightly payments were paid to you from the compensation institution.

There was no lump sum payment or payment for loss of earnings.

You did not receive compensation for pain and suffering.

Your accountant has always entered the compensation payments on your income tax returns on page 1 at section 1 under income salary or wages. You have never questioned the entry until this year.

An investment property was sold in the 2010-11 financial year of which you owned a half share. You telephoned the ATO capital gains tax team and the superannuation team because your super advisor said that the ATO tax ruling TR 2010/1 allowed you to make a super contribution for a reduction in your capital gains.

The ATO team advised you that you were entitled to make a personal superannuation contribution before 30 June 2011 into your complying super fund which would incur a 15% tax charge. The ATO teams were advised that you were entering your compensation payments on page 2 under salary or wage and there was no mention that the entry was incorrect. You were advised to enter the super contribution in section D on your tax return for a capital gains deduction.

You have a letter from your super fund confirming that they received a notice of intent to claim form from you.

You have a letter from your former employer confirming that you retired from their employment and have not worked with them in any capacity since.

Your arguments and references

You had your accountant do a scenario for your income tax returns 2010 and 2011. You approached your super fund and made a personal concessional (deductible) contribution. The super fund then notified the ATO which was done before 30 June 2011.

Your income tax returns were submitted in November 2011.

The ATO advised you that your personal superannuation contribution was disallowed because it did not meet the 10% rule of income from an employment activity.

You applied to the ATO for the decision to be reviewed stating that the compensation payments that you were receiving were not derived from any employment activity or as an income as you had retired from full time employment in the 2008-09 financial year.

You further explained that the income you received each year was a compensation payment as a result of a workplace injury. The review outcome was that you were required to pay an amount to the ATO.

You asked your super fund to apply to the ATO to recover the 15% that had been disallowed as a super contribution. Your super fund advisor said that the ATO would not allow the organisation to claim the tax back from the ATO.

You spoke to a certain number of people at the ATO regarding the return of the 15% that you had paid for a contribution into your super fund. Finally you spoke to two officers for advice on CGT and super contributions who advised you that there was no way that the ATO would refund the 15%.

You rang the ATO helpline and asked where your workers compensation payments should be entered on your income tax return. You were advised that the payments should go on page 4 under section D number 5 other work-related expenses.

Upon checking your tax returns for individuals 2011 that had been submitted you discovered that your accountant had made a mistake with entering your workers compensation benefits on page 2 section 1 salary or income wages. A third entry of salary and wages is incorrect as it is a double entry.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 290-150

Income Tax Assessment Act 1997 Section 290-155

Income Tax Assessment Act 1997 Section 290-160

Income Tax Assessment Act 1997 Section 290-165

Income Tax Assessment Act 1997 Section 290-170

Superannuation Guarantee (Administration) Act 1992 Section 12

Workplace Injury Management and Workers Compensation Act 1998 Subsection 264(3)

Reasons for decision

Assessability of workers' compensation payments

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) advises that your assessable income includes income according to ordinary concepts, which is called ordinary income.

Income according to ordinary concepts has been held by the courts to include income from the rendering of personal services, income from property and income from carrying on a business.

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). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster 89 ATC 5142, 20 ATR 1516; Tinkler v. FC of T 79 ATC 4641, 10 ATR 411; Case Y47 91 ATC 433, 22 ATR 3422).

Although you have retired from your employment, the insurer continues to make periodical payments to you to compensate for the loss of earnings. These payments will continue to be characterised as income according to ordinary concepts. The compensation payments are therefore assessable as ordinary income under section 6-5 of the ITAA 1997.

Completing your income tax return

TaxPack advises that you are to include amounts for lost salary or wages paid under a workers compensation scheme at Question 1 on your tax return. They are not to be declared at Question 24 Other income.

Personal superannuation contribution deduction (PSC)

To claim a deduction for a PSC made during the 2010-11 financial year, you must have made a contribution to a superannuation fund, or a Retirement Savings Account, for the purpose of providing superannuation benefits for yourself. In addition, all the conditions specified in section 290-150 of the Income Tax Assessment Act 1997 (ITAA 1997) must be met.

These conditions are:

where the contribution is made to a superannuation fund, the fund must be a complying fund in the income year that the contribution was made; and

you must satisfy the age related conditions; and

you must have given a valid notice of intent to the superannuation fund or RSA provider in the approved form by the required time and received an acknowledgment from the fund; and

where applicable, you must not have exceeded the 'maximum earnings as employee condition'.

 Complying fund condition

 Section 290-155 of the ITAA 1997 states that if your contribution is made to a superannuation fund, it must be a complying fund for the income year in which you made the contribution.

 In your tax return, you advised that your contributions were made to your super fund which is a complying superannuation fund.

You have met the complying fund condition.

 Age related condition

 Section 290-165 of the ITAA 1997 provides that age related conditions must be met to be entitled to claim a deduction. Generally you must be between 18 and 75 years of age to be entitled to claim a deduction.

 You have met this condition.

 Valid notice of intent to deduct condition

 Section 290-170 of the ITAA 1997 provides that in order for a contribution, or a part of the contribution, to be deductible you must have given a valid notice to the superannuation fund, in the approved form. The notice must state your intention to claim a deduction before the earlier of the day on which you lodge your income tax return for the income year in which the contribution was made and the end of the next income year. Additionally, the superannuation fund must have acknowledged receipt of your notice.

ATO records show when you lodged your income tax return for the 2010-11 financial year. As this was before the end of the next income year, this was the required date for giving the notice of intent to your superannuation fund.

You have supplied a letter from your fund confirming receipt of your notice of intent. This letter confirms that you provided a notice of intent to your superannuation fund before the required date. 

You have therefore met this condition.

Maximum earnings as employee condition

Section 290-160 of the ITAA 1997 provides that when you have income that is attributable to an employment activity, the amount you earn from that activity must be less than 10% of your combined assessable income and reportable fringe benefits for that income year. 

The amount of income that is attributable to an employment activity is derived from engaging in any of the following activities:

holding an office or appointment;

performing functions or duties;

engaging in work; and

doing acts or things.

Any of these activities would result in you being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA).

Taxation Ruling TR 2010/1 - Income tax: superannuation contributions explains that the critical factor here is whether you were an employee for the purposes of the SGAA in the income year.

Note that a person need not be physically engaged in an activity, for example, a common law employee will be 'engaged' in an employment activity while they remain employed even if no duties were carried out in the income year.

You retired in the 2008-09 financial year and have not worked for your former employer in any capacity since your retirement date.

Amounts shown as income on your 2010-11 income tax return relates to workers compensation, paid by the compensation institution.  There is no employment relationship between you and the institution therefore this amount is not income that is attributable to an employment activity.

As you are not an employee under the SGAA in the 2010-11 financial year, this condition is not applicable to you.

Conclusion

You have met all the conditions which are required under section 290-150 of the ITAA 1997. Accordingly, your PSC deduction is allowed.