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Edited version of your private ruling
Authorisation Number: 1012612419382
Ruling
Subject: Assessability of compensation payments
Question 1
Are the fortnightly incapacity payments you receive exempt income?
Answer
No.
Question 2
Should pay as you go (PAYG) withholding tax be withheld from the fortnightly incapacity payments?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You were a member of the Defence Force.
You suffered injuries while on duty.
You were medically discharged.
At the time you were discharged you had no civilian employment.
You receive a fortnightly incapacity compensation payment.
The payments you receive are paid under section 19 of the Safety Rehabilitation & Compensation Act 1988 (SRCA 1988) and are calculated at the rate of 75% of seven times your daily rate of pay.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-15.
Income Tax Assessment Act 1997 Section 6-20.
Income Tax Assessment Act 1997 Section 51-33.
Taxation Administration Act 1953 Section Sch1-12-1.
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer shall include the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the taxation year.
Section 6-15 of the ITAA 1997 provides that ordinary income which is exempt income is not assessable income.
Section 6-20 of the ITAA 1997 provides that ordinary income is exempt income if it is made exempt from income tax by a provision of the Income Tax Assessment Act 1936, the ITAA 1997 or another Commonwealth law.
Division 51 of the ITAA 1997 deals with amounts of ordinary income and statutory income that are exempt from income tax.
Subsection 51-33(1) of the ITAA 1997 states that compensation payments for the loss of your pay or allowance are exempt from income tax if:
a) the compensation payment is made under the SRCA 1988 in respect of an injury you suffered; and
b) you suffered your injury while serving as a Defence reservist (but not while on continuous full time service); and
c) your pay or allowance was payable for services as a Defence reservist.
In your case the compensation payments (normal weekly earnings) you received under the SRCA 1988 are not payments of your part time pay for services performed at the time of injury, it is a substituted (greater) amount. These normal weekly earnings are referred to as 'notional earnings', as for example under subsection 8(8) of the SRCA 1988.
When your weekly earnings are regarded as 'notional earnings' and the specific amount cannot be identified as being paid for the actual loss of reservist pay or allowances, there are no grounds to apportion the payment and no amount is exempt (Branson V FC of T (2008) ATC 20-080).
As your fortnightly incapacity compensation payments are not exempt payments under section 51-33 of the ITAA 1997, they are considered assessable income and subject to PAYG withholding under section 12-1 of Taxation Administration Act 1953.