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Edited version of your written advice
Authorisation Number: 1051371273609
Date of advice: 9 May 2018
Ruling
Subject: Lump Sum Redemption Payment
Question
Is the lump sum payment, paid under Section 54 of the Return to Work Act 2014, for redemption of Medical Expenses, assessable pursuant to the provisions of the Income Tax Assessment Act 1997?
No
This ruling applies for the following period:
Period ending 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
You suffered a work injury where you sustained permanent impairment arisen from your employment.
You have made an agreement with your employer under Section 54 of the Return to Work Act 2014.
Your self-insured employer had an undischarged liability to pay compensation for medical and other expenses under Section 33 of the Return to Work Act 2014
You and your self-insured employer reached an agreement for the redemption of the undischarged liability.
The lump sum payment under Section 33 of the RTW is a capital payment.
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)
Reasons for decision
Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (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.
Section 54 and 33 of the RWA
You have received a lump sum redemption amount pursuant to section 54 of the RWA and the amount received will be compensation for medical expenses in relation to a work injury suffered by a worker. This is a payment of a capital nature and the money you received is to compensate medical expenses. Therefore, the payment will not be assessable as ordinary 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 under sections 54 of the RWA 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.
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 payments will not be assessable as statutory income.
As the lump sum payments pursuant to sections 54 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.
Additionally, as the criteria in subsection 82-135(i) of the ITAA 1997 are satisfied the payment is excluded from being an Eligible Termination Payment.