Edited version of your written advice

Authorisation Number: 1051379330772

Date of advice: 29 May 2018

Ruling

Subject: Compensation Work Related

Question:

Is a lump sum workers compensation payment in respect of weekly payments from the workers compensation authority assessable income?

Answer

Yes

Question:

Is a lump sum workers compensation payment in respect of future medical payments from the workers compensation authority assessable income?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

Summer 20XX

Relevant facts and circumstances

You received a lump sum worker’ compensation payment from the as a result of a workplace injury which was determined to be compensable.

You sustained various injuries at various dates commencing in Summer 20AA and ending recently.

Until recently you received compensation payments to replace your income. However your local workers compensation authority agreed to cease payment of income replacement and settled a lump sum to provide compensation for personal injury incurred during the course of your normal duties.

Under an agreement made under the relevant act you will receive a payment of $X being in respect of weekly payments and $Y in respect of payments for future medical expenses.

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 6-15.

Income Tax Assessment Act 1997 Section 15-30.

Income Tax Assessment Act 1997 Paragraph 118-37(1)(a).

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

Ordinary income has generally been held to include three 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.

Your compensation is not income from rendering personal services, income from property or income from carrying on a business. The payment is a one off payment and thus it does not have an element of recurrence or regularity.

A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. Compensation for personal injury and loss of earning capacity are generally regarded as being capital in nature.

In your case, the lump sum payment is made in respect to injuries suffered during your employment which affects your future income earning capacity.

Taxation Determination TD 93/58 states that any part of a lump sum compensation amount will only be assessable as ordinary income:

(a) if the payment is compensation for loss of income only, or

(b) to the extent that a portion of the lump sum is identifiable and quantifiable as income. This is possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.

The lump sum compensation payment you receive is in settlement of your injury at work and includes an amount of $X “in respect of weekly payments” and $Y “in respect of future medical expenses.”

That part of the payment that is capital in nature is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 includes amounts of statutory income in assessable income, that is, amounts that are specifically listed as assessable income in Division 10 of the ITAA 1997. The two provisions applicable in your case are section 15-30 of the ITAA 1997 and Part 3-1 of the ITAA 1997.

Section 15-30 of the ITAA 1997 operates to include in your assessable income an amount received as insurance or indemnity for loss of an amount if the loss amount would have been included in assessable income and the amount received is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Part of your compensation amount does not meet this description, as it is not paid for loss of earnings but in respect to your medical expenses.

Accordingly, section 15-30 of the ITAA 1997 will not apply to the compensation amount which relates to payments under Section 33 of the Act.

In your case the payment of $X “in respect of weekly payments” should be included as ordinary income while the payment of $Y “in respect of future medical expenses” does not need to be included.

Capital gains tax

Taxation Ruling TR 95/35 indicates that settlement of a personal injuries claim represents the disposal of an asset, as you have disposed of the right to seek compensation for the losses arising from the injury suffered.

Part 3-1 of the ITAA 1997 contains the general capital gains tax (CGT) provisions. The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(a) of the ITAA 1997 disregards payments or receipts for the purposes of the CGT provisions where the amount relates to compensation or damages you received for any wrong, injury or illness suffered in your occupation.

The compensation amount of $Y meets this description. Paragraph 118-37(1)(a) of the ITAA 1997 will apply to the compensation amount so that any capital gain or capital loss will be disregarded.