Edited version of your written advice

Authorisation Number: 1051209107801

Date of advice: 31 March 2017

Ruling

Subject: Your worker's compensation payment

Question 1

Is the $XXXX lump sum amount paid to you to replace weekly payments assessable income?

Answer

Yes.

Question 2

Is the $XXXX compensation payment paid to you for future medical expenses assessable income?

Answer

No.

Question 3

Will any capital gain arising from the compensation amount be disregarded?

Answer

Yes.

This ruling applies for the following period(s):

Year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You received a compensation payment of XXXX your former employer.

$XXXX was to replace weekly payments and $XXXX was for future medical expenses.

This compensation payment is in full and final settlement of any future claims.

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

Subsection 6-5(2) of the Income Tax Assessment Act (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.

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.

The $XXXX compensation payment made to you is to replace the weekly payments you were receiving.

The $XXXX can be said to be expected and relied upon.

The $XXXX you received to replace the weekly payments is assessable under subsection 6-5(2) of the ITAA 1997.

Although the payment of $XXXX 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.

Section 15-30 of the ITAA 1997 operates to include in your assessable income any amount received by way of insurance or indemnity for the loss of an amount if:

a) The loss amount would have been included in your assessable income; and

b) The amount you receive is not assessable as ordinary income under section 6-5.

The lump sum amount paid to you for future medical expenses of $XXXX does not meet this description as it was not paid for loss of earnings but in satisfaction of the giving up of capital rights.

Section 15-30 of the ITAA 1997 does not apply to the lump sum amount of $XXXX.

Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gains tax event relating directly to compensation or damages you receive for any wrong or injury you suffer in your occupation.'

The lump sum amount paid of $XXXX meets this description.

Section 118-37 of the ITAA 1997 applies to the lump sum amount of $XXXX so that any capital gain or capital loss you make will be disregarded.