Edited version of your written advice

Authorisation Number: 1051322945365

Date of advice: 21 December 2017

Ruling

Subject: Compensation from incapacity sustained on United Nations service as exempt income.

Question

Are compensation payments received as a result of injury sustained whilst on United Nations service considered exempt for income tax purposes?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You were employed by the Government.

You were engaged to work with the United Nations on several missions.

Your service on these missions resulted in impairment or incapacity which has been recognised by Comcare and the Federal Government you work for.

You have been in receipt of compensation payments for incapacity for work under section 14 of the Safety, Rehabilitation and Compensation Act 1988 (SRCA). There payments are calculated on a percentage of your pre injury income and capped at an upper limit.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AB(5)

Income Tax Assessment Act 1997 section 6-5(1)

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 section 6-20

Veterans’ Entitlement Act 1986 Schedule 2

Safety, Rehabilitation and Compensation Act 1988

Reasons for decision

Ordinary Income

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that your assessable income includes income according to ordinary concepts, which is called 'ordinary income'.

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 or relied upon

● have an element of periodicity, recurrence or regularity, and

● it replaces income.

Your payments for incapacity for work have originated out of section 14 of the SRCA. It applies to a person who is incapacitated for work.

To determine whether or not these payments are ordinary income, we need to look at how they were calculated and what they were designed for.

The compensation that you have received because of your incapacity for work is designed to replace income that would have been earned, expected, relied upon and would have had 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 (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 8 AITR 443). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516, Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411, Case Y47 91 ATC 433; AAT Case 7328 (1991) 22 ATR 3422).

Therefore your compensation payments are regarded as ordinary assessable income.

Exempt Ordinary Income

Section 6-15 of the ITAA 1997 provides that if an amount is 'exempt income', then it will not be assessable income.

Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law.

Section 23AB of the Income Tax Assessment Act 1936 (ITAA 1936) deals with the income of certain persons serving with an armed force under the control of the United Nations. Under subsection 23AB(5) there are three conditions which must be met in order for the income to be considered exempt.

Where a payment of compensation under the Safety, Rehabilitation and Compensation Act 1988 is made in respect of the incapacity, impairment or death of a taxpayer; and

the incapacity, impairment or death of the taxpayer resulted from an occurrence that happened during the performance by the taxpayer of United Nations service; and

if the taxpayer had, at the time of the happening of the occurrence, been a member of the Defence Force rendering continuous full-time service outside Australia while the taxpayer was allotted for duty in an operational area described in item 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 or 14 of Column 1 of Schedule 2 to the Veterans' Entitlements Act 1986, the Commonwealth would be liable to pay a pension under that Act in respect of the incapacity, impairment or death of the taxpayer;

the payment of compensation is exempt from income tax.

While your situation falls within the parameters of paragraph section 23AB(5)(a) and (b) it does not meet paragraph (c). The missions you served on are not listed in the operational areas described in the Schedule 2 to the Veterans’ Entitlement Act 1986. As such, your compensation payments will not be exempt from tax under subsection 23AB(5) of the ITAA 1936 and retain the character of ordinary income.