Edited version of your written advice

Authorisation Number: 1012692010254

Ruling

Subject: Repayment of sickness benefits

Question 1

Should the full amount of your lump sum workers compensation payment listed on your group certificate be included as assessable income for the 2013-14 income year?

Answer

No

Question 2

Is the amount of your lump sum workers compensation to be included in your assessable income reduced by the amount of benefits repaid to Centrelink on behalf of you and your spouse?

Answer

Yes

This ruling applies for the following period(s)

Income year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You suffered a workplace injury.

Following proceedings with the Workers Compensation Commission it was agreed you would receive weekly compensation from date x paid as a lump sum.

Of this amount $x was repaid to Centrelink and $x was withheld in tax.

The amount deducted was related to benefits both you and your spouse received from centrelink.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Compensation payments

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income. 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.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) (Dixon's case). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

The issue of whether the redemption or conversion of an entitlement to periodic payments to a lump sum affects assessability was considered in Coward v. FC of T 99 ATC 2166; (1999) 41 ATR 1138. In that case Mathews J found that payments made to replace income take on the character of the payment they replace and that the method of payment does not alter the character of the payment. Mathews J held that as the weekly compensation payments made to the appellant until he turned 65 were paid for loss of earnings and thus constituted income, a lump sum representing redemption of those future weekly payments was also income.

This is consistent with the approach taken by the Commissioner in Taxation Determination TD 93/3 which deals with the partial commutation of periodic payments to a lump sum. As outlined in paragraph 4 of TD 93/3, such a commutation would result in the lump sum remaining assessable, as its effect was simply to pay in advance the future weekly payments.

Therefore, where future regular payments are ordinary income and commuted to a lump sum, the lump sum payment also retains the character of being ordinary income and would be assessable in the income year in which the payment was received.

In your case, you received a lump sum for your previous years entitlement. The receipt of your weekly entitlements as a lump sum does not change the nature of the payment. The payment is regarded as ordinary assessable income and is assessable under subsection 6-5(2) of the ITAA 1997.

Repaid assessable Centrelink benefits

Section 59-30 of the ITAA 1997 operates to exclude an amount from your assessable income for an income year if you have repaid it in a later income year and you cannot deduct the repayment in any income year.

However, subsection 59-30(3) of the ITAA 1997 states that section 59-30 does not apply to an amount you must repay because you received a lump sum as compensation or damages for a wrong or injury you suffered in your occupation.

As you received compensation for a work place injury, subsection 59-30(3) of the ITAA 1997 applies in your case. Therefore section 59-30 of the ITAA 1997 has no application in your circumstances.

Taxation Ruling IT 2107 states that where workers' compensation is awarded after payment of assessable sickness benefits, the appropriate amount of sickness benefits is to be repaid to the Director General of Social Security. Provision is made for the repayment from the lump sum payment due to the employee. In these circumstances it is considered that the amount of the lump sum arrears of compensation reduced by the amount of sickness benefits repaid to the Director General of Social Security is the amount to be included in the assessable income of the compensated party in the year of receipt.

You received support from Centrelink after your workplace injury. You were subsequently awarded a lump sum workers' compensation payment. A portion of the lump sum received was used to repay Centrelink for the support you and your spouse received during the period covered by the compensation payout.

Therefore, in applying IT 2107, the lump sum payment included as assessable income on your 2013-14 income tax return should be reduced by the amount of assessable Centrelink payments you received for the same period.