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Edited version of your written advice
Authorisation Number: 1012864379739
Date of advice: 21 August 2015
Ruling
Subject: Assessable Income - Compensation
Question 1
Are the amounts paid to you in relation to weekly benefits assessable income?
Answer
Yes.
Question 2
Is the amount paid to you in relation to medical expenses assessable income?
Answer
No.
Question 3
Will the amounts paid to you that are assessable income be assessable in the 2015-16 income year?
Answer
Yes.
This ruling applies for the following period(s)
Year ending 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
You were injured at work.
You engaged a lawyer to file for workers compensation on your behalf.
After examination of your records your lawyer concluded that you were entitled to claim an amount in lost wages.
After negotiations between your lawyer and the workers compensation insurer a settlement amount lower than your original claim was agreed upon.
The relevant workers compensation commission issued a Certificate of Determination which dissected your lump sum payment between the amount for your entitlement to weekly benefits under the relevant workers compensation legislation and the amount for medical expenses.
You received your compensation payment, less PAYG withholding, during the 2015-16 income year.
Relevant legislative provisions
Section 6-5 of the Income Tax Assessment Act 1997.
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 during the income year.
Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business.
Other characteristics of 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.
Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.
Question 1
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; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (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).
Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.
In your case the payment made to you by the workers compensation insurer, even though being a lump sum, was compensation largely intended to replace the wages you would have normally earned. The relevant workers compensation legislation provides for entitlement to weekly compensation payments. The information supplied in the certificate of determination by the workers compensation commission sets out how the lump sum payment was dissected. It shows that the majority of the lump sum was in relation to your entitlement to weekly compensation benefits. This makes a large portion of the payment identifiable and quantifiable as income.
The amounts you received in relation to weekly benefits are assessable under subsection 6-5(2) of the ITAA 1997.
Question 2
Although the payment made to you in relation to medical expenses can be said to be expected, and perhaps relied upon in order to pay your medical bills, this expectation arises from the medical treatment required resulting from the injury, rather than from a relationship to personal services performed.
Accordingly, the payment is not ordinary income and is therefore, not assessable under section 6-5 of the ITAA 1997.
Question 3
Taxation Ruling IT 2107 sets out the Commissioner's policy on the derivation of lump sum in arrears payments for sickness benefits and workers compensation. Paragraph 2 of IT 2107 states that the workers compensation payment is derived when you receive it.
In your case you derived the amounts in relation to weekly benefits during the 2015-16 income year, therefore you should record this income in your tax return for that year.