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Edited version of your written advice
Authorisation Number: 1013114109788
Date of advice: 27 October 2016
Ruling
Subject: Assessability of your lump sum compensation payment
Question 1
Will the amount or any portion thereof to be paid pursuant to section 58 of the Return to Work Act 2014 (SA), be included in your assessable income?
Answer
No.
Question 2
Is there any capital gain with the compensation payment you received?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You sustained permanent impairment said to have arisen from your employment.
You will receive a lump sum compensation payment for non-economic loss pursuant to section 58 of the Return to Work Act 2014 (SA).
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 15-30
Income Tax Assessment Act 1997 Section 118-37
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).
Ordinary income has generally been held to include three 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.
The compensation you received was not income from rendering personal services, income from property or income from carrying on a business. The payment is also a one off payment and thus it does not have an element of recurrence or regularity.
Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However no component of the amount you received was received to compensate for loss of income.
Accordingly, no part of the lump sum compensation payment is assessable under section 6-5 of the ITAA 1997.
Capital gains
Additionally, paragraph 118-37(1)(a)(ii) of the ITAA 1997 needs to be considered as this operates to disregard a capital gain or capital loss from a capital gains tax (CGT) event which relates directly to compensation or damages received for any wrong or injury suffered by a person personally.
Accordingly, in your case, the compensation received was for an injury suffered by you in your workplace resulting in a permanent impairment. The 'injury' suffered for the purposes of paragraphs 118-37(1)(a) or (b) of the ITAA 1997 is the loss that you have suffered and therefore, the lump sum payment is exempt from CGT.
In conclusion, you will not be subject to capital gains tax in respect of the amount you received to compensate you for the injuries you received.