Edited version of your private ruling

Authorisation Number: 1012408267121

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Assessability of compensation payment

Question and answer:

Is the lump sum payment you received included in your assessable income in the year the payment was received?

Yes.

This ruling applies for the following period:

1 July 2011 to 30 June 2013.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances:

You were injured at work.

You lodged a claim for workers compensation (your claim) with your employer.

You employer accepted your claim and you were entitled to benefits under the relevant compensation Act.

You entered into an agreement to redeem the weekly entitlements payable to you under the relevant compensation Act.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Assessable income - general

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) specifies that if you are an Australian resident, your assessable income includes the ordinary income you derive directly or indirectly from all sources, whether in or out of Australia in an income year.

Salary and wages are ordinary income.

Subsection 6-5(4) of the ITAA 1997 states that in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

To avoid confusion over when salary or wages are derived by a taxpayer, paragraph 42 of Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings states that salary, wages or other employment remuneration are assessable on receipt, even though they relate to a past or future income period.

Assessability of compensation payments

Compensation payments which are a substitute for income (salary and wages for example) have been previously held by the courts to be assessable as ordinary income (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

This position by the courts is reflected in Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? which specifies that receipt of a lump sum compensation payment will be assessable as ordinary income:

· if the payment is for loss of income only, or

· to the extent that a portion of the payment is identifiable and quantifiable as being related to a loss of income.

The issue of the assessability of compensation payments is also addressed in Taxation Determination TD 93/3 Income tax: is a payment, being a partial commutation of weekly compensation payments, assessable income?

Although Taxation Determination TD 93/3 deals with the issue of partial; commutation of weekly payments, the principles in terms of the assessability of lump sum payment that results from any commutation, are the same. This is the case regardless of whether there is a full or partial commutation.

As noted in paragraph 4 of TD 93/3 (and as stated above), weekly payments paid as compensation for loss of income or salary are assessable as ordinary income. Any lump sum payment that results from a commutation of such weekly payments (whether partial or in full) retains the assessable nature of the weekly payments. Effectively, the lump sum payment is simply an advance of future weekly payments of lost salary and wages and remains assessable as such under the provisions of section 6-5 of the ITAA 1997.

The lump sum payment you received was made under provisions of the relevant compensation Act which require that where there is a liability under that act to make weekly payments to an employee for loss of income, those payments must be redeemed (in certain circumstances) by way of a lump sum payment to the employee.

As the lump sum payment was made to you to redeem future weekly payments for loss of income, the lump sum, is assessable as ordinary income under the provisions of section 6-5 of the ITAA 1997 in the year you received the lump sum.