Edited version of your written advice

Authorisation Number: 1051334690284

Date of advice: 6 February 2018

Ruling

Subject: Assessability of your lump sum payment

Question

Is the lump sum payment you received pursuant to section 33 and 54(1)(a) of the Return to Work Act 2014 (SA)(RWA) assessable as either ordinary income or as a capital gain?

Answer

No.

Question

Is the lump sum payment you received as a retraining allowance assessable as either ordinary income or as a capital gain?

Answer

No.

Question

Is the lump sum payment you from your Employer an employment termination payment (ETP) for the purposes of Division 82 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You sustained permanent impairment said to have arisen from your employment.

You made a claim for compensation pursuant to the RWA, which was rejected.

You lodged an Application for Review in the State A Employment Tribunal.

It was also found that you were entitled to a retraining allowance.

You also entered into a separate agreement for the redemption of your entitlement to future weekly payments and future medial and like expenses pursuant to sections 53 and 54 of the RWA.

You have been paid a payment for weekly payments and a payment for medical and like expenses.

You are aware that the payment for weekly payments pursuant to section 53 of the RWA is assessable as ordinary income as per 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?

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 15-30

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subparagraph 118 37(1)(a)(i)

Income Tax Assessment Act 1997 Division 82

Income Tax Assessment Act 1997 section 82-10.

Income Tax Assessment Act 1997 section 82-130.

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 section 82-140.

Income Tax Assessment Act 1997 section 82-145.

Income Tax Assessment Act 1997 section 82-150.

Income Tax Assessment Act 1997 section 82-155.

Superannuation Industry (Supervision) Regulations 1994 subregulation 6.01(2).

Reasons for decision

Section 6-5 and section 6-10 of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary and statutory income (for example, capital gains) derived directly and indirectly from all sources, whether in or out of Australia during the income year

The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies its likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income, as are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts.

In your case, you are entitled to a lump sum payment under serval sections of the RWA.

Section 33 of the RWA entitles a worker to compensation for medical expenses in relation to a work injury suffered by a worker.

In your case, your one-off lump sum payment pursuant to sections 33 and 54(1)(a) of the RWA is baring none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity, and nor is it paid to compensate for loss of income. Therefore, the lump sum is capital in nature and will not be assessable as ordinary income.

Retraining allowance

This portion of the lump sum is not a compensation payment and has not been paid for loss of earnings nor will it recur in the future.

The payment is a contribution towards a private expense and is not included in your assessable income.

Statutory income

The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation.

In your case, the lump sum payment has been received as compensation for a ‘wrong or injury you have suffered in your occupation’, being the loss of body functionality in respect of your workplace injury/injuries.

Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118 37(1)(a)(i) of the ITAA 1997 and the payment will not be assessable as statutory income.

As the lump sum payment pursuant to section 33 and 54 (1)(a) of the RWA is not assessable as either ordinary or statutory income, you are not required to include the amount in your assessable income.

Employment termination payments

Division 82 of the ITAA 1997 sets out how ETP are treated for income tax purposes.

In accordance with section 82-130 of the ITAA 1997, a payment is ETP if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

In consequence of termination of employment

The phrase ‘in consequence of’ is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner’s view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraphs 5 and 6 of TR 2003/13 the Commissioner states:

5.... a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In this instance, to settle the Claim, you are to terminate your employment with the Employer on a specified date. Following the termination, within seven days of receiving a duly executed copy of the Agreement from you, the Employer is to pay you a specified amount.

Although the dominant cause of the payment is to settle the Claim initiated by you, there is a causal connection between the termination of employment and the payment. In this case, the termination is a pre-condition for the payment.

Based on the Commissioner's views expressed in TR 2003/13, there is, in this case, a clear connection between the termination of your employment and the payment of the Settlement Sum. That is, but for the termination, the Settlement Sum would not be paid to you.

Consequently, the payment of the Settlement Sum is ‘in consequence of’ the termination of your employment with the Employer.

Payment is received no later than 12 months after termination

At the time you applied for a private ruling, you have not yet resigned from your employment. The Settlement Sum was to be paid by the Employer after the termination and within seven days of receiving a duly executed copy of the Agreement from you. Provided the Settlement sum is received within 12 months of the termination of your employment, this condition will be satisfied.

Additionally, the payment of the Settlement Sum is not a payment mentioned in section 82-135 of the ITAA 1997. Therefore, the Settlement Sum is an ETP pursuant to section 82-130 of the ITAA 1997.

Taxation of employment termination payments

An ETP made may be comprised of the following components:

● the tax fee component; and

● the taxable component

Subsection 82-10(1) of the ITAA 1997, states that the ‘tax free component’ of a life benefit termination payment is not assessable income and is not exempt income.

Tax free component is defined in section 82-140 of the ITAA 1997 as so much of the ETP as consists of the following:

(a) the invalidity segment of the payment with the meaning of section 82-150 of the ITAA 1997;

(b) the pre-July 83 segment of the payment within the meaning of section 82-155 of the ITAA 1997.

Based on the information provided, it is unlikely that the Settlement Sum will consist of a tax free component. That is, the payment will consist entirely of the taxable component.

Taxable component

Pursuant to section 82-10(2) of the ITAA 1997, the taxable component of a life benefit ETP is assessable income.

In accordance with section 82-145 of the ITAA 1997, the taxable component of an ETP is the amount remaining after deducting the tax free component from the total payment.

For recipients below preservation age, the taxable component of an ETP is taxed at 30% for amounts below the ETP cap amount ($200,000 for the 2017-18 income year), and at the top marginal rate for amounts above the cap (subsection 82-10(3) of the ITAA 1997).

Preservation age for persons born after 30 June 1964 is 60 years (subregulation 6.01(2) of the Superannuation Industry (Supervision) Regulations 1994.