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Edited version of your private ruling
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Ruling
Subject: Compensation payments
Question 1
Is the lump sum compensation payment you will receive as a result of the death of a relative included in your assessable income?
Answer
No.
Question 2
Are the weekly benefits paid to you as a result of the death of a relative included in your assessable income?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commenced on
1 July 2011
Relevant facts and circumstances
A relative passed away at work during the 2011-12 financial year.
A claim was lodged because as a dependant you were entitled to compensation for a fatal injury.
You were entitled to compensation under the relevant workers compensation act because at the time of your relative death you were dependent upon their earnings.
The compensation payable under the Act is:
· a lump sum compensation amount
· a weekly benefits amount equal to a portion of the average weekly earnings at the time the payment is made.
You commenced receiving the weekly benefits during the 2011-12 financial year.
You will receive a lump sum compensation amount.
Relevant legislative provisions
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)
Reasons for decision
Summary
The weekly benefits payments are ordinary income and are assessable income. These payments are included in your taxable income.
However, the lump sum compensation payment is not ordinary or statutory income. Consequently, the lump sum compensation payment is not assessable income so you do not have to pay income tax on it.
Detailed reasoning
The assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Ordinary income is income according to ordinary concepts which is not specifically defined in the legislation.
However, characteristics of ordinary 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.
Payment for personal services, whether received in the capacity of an employee or otherwise in connection with employment or other personal services income is income according to ordinary concepts. Similarly, any payment (for example compensation) to replace income is also considered to be income for ordinary concepts.
Where an amount of income is not ordinary income it may be included in a taxpayer's assessable income under section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997). This income is called statutory income and is made assessable by a specific provision of the taxation legislation.
Where an amount is not ordinary income or statutory income it is not assessable income and you do not have to pay tax on it.
Lump sum compensation payment
The lump sum compensation payment you will receive as a result of the death of your relative is not ordinary income. The payment is not a payment for personal services and does not have the characteristics of ordinary income.
Some compensation payments may be statutory income and assessable. However, section 118-37 of the ITAA 1997 specifically excludes compensation or damages received for any wrong, injury or illness your relative suffers personally.
Thus the lump sum compensation payment is not statutory income.
The lump sum compensation payment you will receive for the death of your relative does not form part of your assessable income and is not subject to tax.
Weekly benefits
The weekly benefits payments are made regularly and are calculated with reference to average weekly earnings. They are made in substitution of income and to provide financial support because at the time of your relative's death you were dependent upon their earnings. You have an expectation of receiving these benefits on a regular basis so that you are able to depend on it for your regular expenditure.
The weekly benefits payments are ordinary income and are included in your assessable income.