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Edited version of your written advice
Authorisation Number: 1012997799712
Date of advice: 13 April 2016
Ruling
Subject: Assessability of compensation payments
Question:
Are the compensation payments you will receive pursuant to Sections 44 and 45 of the Workers Rehabilitation and Compensation Act 1986 (South Australia) (WRCA) assessable as ordinary income or as a capital gain?
Answer:
No
This ruling applies for the following periods
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commences on
1 July 2015
Relevant facts and circumstances
You will receive a lump sum compensation payment as a result of a death benefit claim under the former Workers Rehabilitation and Compensation Act 1986 (SA) (the WRCA).
The payment consists of amounts paid for:
• Counselling and funeral expenses,(section 45B and 45C of WRCA.)
• Costs and disbursements.
• A commutation of weekly payments payable under section 44 of the WRCA, and
• A lump sum payable due to the death of your spouse.(Section 44A of WRCA).
• Medicare, medical and like expenses remain your responsibility.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5(2)
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 6-15(1)
Workers Rehabilitation and Compensation Act 1986 (SA) section 44
Workers Rehabilitation and Compensation Act 1986 (SA)Subsection 44(14)
Workers Rehabilitation and Compensation Act 1986 (SA) section 45A(15)
Workers Rehabilitation and Compensation Act 1986 (SA) section 45B
Workers Rehabilitation and Compensation Act 1986 (SA) section 45C)
Income Tax Assessment Act 1997 Paragraph Section 104-25
Income Tax Assessment Act 1997 Paragraph 118-37(1) (a)
Reasons for decision
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.
Subsection 44(14) of the WRCA provides that any weekly payments payable under section 44 can be commuted to a lump sum payment that is actuarially equivalent to the weekly payments.
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.
Payment for funeral expenses, counselling, and the lump sum compensation payment for the death of a person are not considered to be ordinary income.
In your case, you have reached a settlement with the compensating authority for a lump sum amount in commutation for any entitlement you may have under section 44 of the WRCA. That amount is capital in nature and 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 your case, the compensation received will be for a 'wrong, injury or illness' you have suffered, being the death of a worker (your spouse) on whom you were dependent.
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 for a personal wrong, injury or illness.
The lump sum amount of compensation you will receive pursuant to Sections 44 and 45 of the WRCA will not be included in your assessable income.