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Edited version of your written advice
Authorisation Number: 1013137969464
Date of advice: 8 December 2016
Ruling
Subject: Lump sum compensation payment
Question
Will the amount or any portion thereof to be paid pursuant to section 33 and paragraph 54(1)(a) of the Return to Work Act 2014 (SA) for medical expenses, be included in your assessable income?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2017
The scheme commenced on
1 July 2016
Relevant facts
You sustained compensable disabilities said to have arisen from your employment.
You will receive a redemption offer pursuant to section 33 and paragraph 54(1)(a) of the Return to Work Act 2014 (SA).
As part of the agreement you have to resign.
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) deals with receipts of ordinary income. It does not operate to include in assessable income amounts of a capital nature. The money to be received will be capital in nature and therefore not assessable income.
Additionally, as the criteria in subsection 82-135(i) of the ITAA 1997 is satisfied the payment is excluded from being an Eligible Termination Payment.
The other applicable sections, section 15-30 of the ITAA 1997 and the capital gains tax provisions of the ITAA 1997, also will not operate to make the payment assessable.
Therefore the payment you receive will not be included in your assessable income.
Additional Information - weekly payments
After broad consultation over the past 12 months, the ATO published Taxation Determination TD 2016/18 - Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (SA) assessable income of the worker?. Our view is that the redemption of a liability to pay weekly payments has the character of income and is assessable under section 6-5 of the ITAA 1997. The determination does not cover redemption of a liability to pay medical expenses. Our view remains that these are tax exempt capital payments.
In reviewing the matter, the ATO committed to adopting a prospective approach (see paragraph three and four of the determination). In dealings with many tax professionals over the past few months this has been explained and we have prepared for the change together. What this means is that we will apply this view only to redemption payments made under agreements entered into on or after 10 August 2016. As we understand it, the date on the redemption agreement is the relevant date. The requirements for obtaining legal advice, financial advice and medical advice must have been fulfilled before an agreement can be formalised.