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Edited version of your written advice
Authorisation Number: 1012713584020
Ruling
Subject: Assessability of compensation receipts
Question
Are the compensation payments that are received by your primary carer assessable to you?
Answer
Yes.
This advice applies for the following period:
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
The scheme commences on:
The scheme has commenced
Relevant facts
You are under the age of 16.
You and your parent are residents of Australia for income tax purposes.
As a result of your other parent passing away, you are entitled to receive compensation payments as a dependent of the deceased.
The weekly payments paid by the insurer, are meant to compensate you for the loss of income support.
The payments made by the insurer are paid to your primary carer on behalf of you.
Once you reach the age of 16, the payments will be made to you directly.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 6-5(4)
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts.
In your case, your primary carer receives compensation payments on your behalf due to the death of your parent. The payments are received as a result of the loss of income support that you would have received from your parent. Hence, the compensation payments that are received are considered ordinary income and therefore assessable under section 6-5(2) of the ITAA 1997.
However, the question arises as to who is assessable on this income
Taxation Determination TD 92/133, Income tax: who is assessable on weekly payments made under subsection 17(5) of the Commonwealth Employees Rehabilitation and Compensation Act 1988 (CERCA)? Does Division 6AA of Part III of the Income Tax Assessment Act 1936 (ITAA) apply?, discusses the Commissioners view on who is assessable for specific compensation receipts.
Taxation Determination TD 92/133 provides that compensation paid under a federal workers compensation act is assessable to the child of the deceased employee and not the child's parent or guardian. Even if the parent actually receives the payments, they are a constructive receipt of the child and therefore deemed to be derived by the child in accordance with subsection 6-5(4) of the ITAA 1997.
TD 92/133 is not confined to payments made under federal legislation but can also be applied to other accident or compensation legislation that applies to dependent children of a deceased parent.
In your case the compensation payments that are paid to your primary carer are paid for the benefit of you. Further as they are paid to your primary caregiver on your behalf, it is considered that the payments are not derived by them in their own right.
Accordingly, the compensation payments are ordinary income and are assessable to you under section 6-5(2) of the ITAA 1997. You are required to complete an income tax return.