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Ruling

Subject: Compensation payment

Question 1

Will the lump sum redemption amount to be paid pursuant to a Workers Rehabilitation and Compensation Act (WRCA) be included in your assessable income?

Answer

No

Question: 2

Will any capital gain arising from the lump sum redemption amounts be disregarded?

Answer:

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were employed.

You suffered a disability.

As a result of your disability, your employer has undischarged liabilities to you to pay compensation for medical and other expenses.

You and your employer have an agreement for the redemption of the undischarged liability to pay for medical and other expenses.

In acceptance of the payment you will give up your right to be paid for any future compensation in relation to your disability.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 6-10,

Income Tax Assessment Act 1997 Section 102-5 and

Income Tax Assessment Act 1997 paragraph 118-37(1)(b).

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with receipts of ordinary income. It does not operate to include in a taxpayer's assessable income amounts of a capital nature.

Ordinary income has generally been held to include income from rendering personal services, income from property, and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

· are earned,

· are expected,

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

The compensation offered to you is not income from rendering personal services, income from property or income from carrying on a business. The payment is also a one off payment and thus it does not have an element of recurrence or regularity.

In order to determine the taxation treatment of a compensation payment, the nature of the compensation payment must be examined, as a compensation amount generally bears the character of that which it is designed to replace (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443: (1952) 10 ATD 82.

Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. As such, any amounts received to compensate for loss of income will be subject to tax under the ordinary income provisions of section 6-5 of the ITAA 1997. 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.

In your case, the lump sum amounts are to be paid under sections 32 and 42 of the WRCA in satisfaction of giving up your rights to future medical expenses and other expenses incurred by you. These rights are of a capital nature, as is the money to be received to compensate you for relinquishing those rights.

As capital amounts, the lump sum payments you will receive under the WRCA will not be assessable as ordinary income under the provisions of section 6-5 of the ITAA 1997.

Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. Section 102-5 of the ITAA 1997 provides that assessable income includes net capital gains for the income year. However, a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally is disregarded, paragraph 118-37(1)(b) of the ITAA 1997.

Accordingly, the settlement amount you will receive is not assessable as statutory income under section 6-10 of the ITAA 1997.

As the lump sum redemption amount to be paid pursuant to the WRCA for your medical and other expenses is not assessable as either ordinary income or statutory income, no part of it is included in your assessable income.