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Edited version of your written advice
Authorisation Number: 1013093715635
Date of advice: 19 September 2016
Ruling
Subject: Income - worker's compensation
Question
Is the compensation payment awarded to you for a workplace injury assessable income?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You sustained an injury at work. You made a claim for injuries to your state's WorkCover authority, and received a small redemption payment.
You subsequently made a further claim for injuries sustained at work. These injuries meant you could no longer continue in your employment. Although your employer denied liability, they agreed to pay a sum for retraining and vocational assistance.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10,
Income Tax Assessment Act 1997 Section 102-5
Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has been held to include income from providing 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 or relied upon
• have an element of periodicity, recurrence or regularity
• replace income.
A compensation amount normally assumes the nature of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount, then it will be regarded as a capital receipt and not ordinary income.
In your case, you suffered a workplace injury. You have been awarded damages for a workplace injury for retraining and vocational assistance as you can longer continue in your employment as a result of the injury.
The payments for the damages awarded were not earned as they do not relate to services performed. The payments are also a one-off payment and therefore it does not have the element of recurrence or regularity. Although the payments can be said to be expected, and perhaps relied upon, this expectation arises from the retraining and vocational assistance required resulting from the injury, rather than from a relationship to personal services performed.
As such, the settlement amount you receive is not assessable as ordinary income under section 6-5 of the ITAA 1997.
Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. Section 102-5 of the ITAA 1997 provides that assessable income includes net capital gains for the income year. However, a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally is disregarded, paragraph 118-37(1)(b) of the ITAA 1997.
Accordingly, the settlement amount you receive is not assessable as statutory income under section 6-10 of the ITAA 1997.
As the settlement amount you receive is not assessable as either ordinary income or statutory income, no part of it is included in your assessable income.