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Edited version of your written advice
Authorisation Number: 1012787326372
Ruling
Subject: Compensation payment
Question:
Are lump sum payments received under subsection 44(14) of the Workers Rehabilitation and Compensation Act 1986 (SA) (the WRCA) included in assessable income?
Answer:
No.
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
Your spouse passed away as a result of a workplace accident.
You and your children were each in receipt of weekly payments pursuant to section 44 of the WRCA.
Pursuant to subsection 44(14) of the WRCA the weekly entitlements were commuted to a lump sum payment for each of you.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Subsection 6-5(2).
Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).
Reasons for decision
Section 44 payment
A receipt is assessable income if:
• it is income in the ordinary sense of the word (ordinary income); or
• it is not ordinary income but through the operation of the legislation it is included in assessable income (statutory income).
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Based on case law, it can be said that ordinary income generally includes receipts that:
• are earned
• are expected
• are relied upon, and
• have an element of periodicity, recurrence or regularity.
An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v Dixon (1952) 86 CLR 540).
Section 44 of the WRCA provides for weekly compensation payments to be payable to various specified dependents where a worker dies as a result of a compensable disability.
Compensation payable under section 44 of the WRCA is for the loss of the deceased's financial support, it is not compensation payable for the loss of your income. Therefore the amount is capital in nature.
Where the compensation amount is paid by way of weekly payments, the regularity of the receipt of those weekly amounts means that they are income according to ordinary concepts when received.
In your case, you and your children each received a lump sum amount in commutation for any entitlement you and your children had under section 44 of the WRCA. The amounts received by you and your children are capital in nature and are therefore not assessable as ordinary income under subsection 6-5(2) of the ITAA 1997.
Statutory income
The receipt of the lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104 25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under paragraph 118 37(1)(b) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong, injury or illness suffered by a person or a relative of that person.
In this case, the compensation received is for a 'wrong, injury or illness' you and your children have suffered, being the death of your spouse, a worker whom you and your children were dependent on.
Therefore, any capital gain or capital loss arising from the CGT event is disregarded under paragraph 118 37(1)(b) of the ITAA 1997 as it relates wholly to compensating you and your children for a personal wrong, injury or illness.
Accordingly, the lump sum amounts of compensation received by you and your children will not be included in the assessable income of you or your children.