Edited version of your written advice

Authorisation Number: 1051474138912

Date of advice: 17 January 2019

Ruling

Subject: Pension payments

Question 1

Are your pension payments assessable income?

Answer

Yes.

Question 2

Are you entitled to a deduction for the travel expenses and fees incurred solely to obtain a medical report as required by entity A?

Answer

Yes.

Question 3

Are you entitled to a deduction for doctor’s fees, medication, travel and other expenses incurred to go to your medical practitioners for treatment?

Answer

No.

Question 4

Are you entitled to a lump sum in arrears tax offset in the 20XX-XX income year?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 20XX to year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

You served several years as an employee.

Your administrative discharge date was a few years ago. This was later changed to a medical discharge date.

The medical discharge allowed you to apply for an incapacity pension.

The pension was approved and you were determined to be disabled. Your pension became payable following your invalidity retirement.

Your invalidity pension is ongoing and subject to regular medical reviews while you are less than 55 years of age.

The pension is paid fortnightly and a back payment lump sum was also paid. The lump sum was paid in mth/20XX and related back to previous years.

You received a lump sum arrears payment.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 159ZR of the Income Tax Assessment Act 1936

Detailed reasoning

Ordinary income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Based on case law, it can be said that ordinary income generally includes receipts that:

● are earned

● are expected

● are relied upon, and

● have an element of periodicity, recurrence or regularity.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82).

Compensation payments or similar payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). Therefore periodic payments received following a disability that replaces lost earnings are generally regarded as assessable income.

In FC of T v. Dixon (1952) 10 ATD 82; (1952) 86 CLR 540, weekly payments to a soldier from his former employer to make up the difference between his civil and military pay has been held to be income according to ordinary concepts. As were regular subsidies paid by a bank to selected former employees in order to counter the eroding effects of inflation on the real value of their pensions in FC of T v. Blake 84 ATC 4661, 15 ATR 1006.

In determining whether the payments you received are assessable, consideration has to be given to the purpose and nature of the payments. One of the intentions under the scheme is to provide benefits in the event of a disability or injury. The scheme provides a fortnightly pension following certain disabilities.

Under the scheme, reference is made to your previous salary when determining the amount of pension you receive. That is, the fortnightly benefits you receive are a percentage of your previous salary. Such payments are in the nature of compensation for a loss of income.

It is acknowledged that you are only receiving this pension after your injury. However, the purpose of the payments is to provide income support while you are unable to carry out your previous duties. They are not regarded as reimbursements for your medical expenses or payments for your injury.

Division 52 of the ITAA 1997 provides exemptions for certain pension, benefits and allowances, however your pension is not listed as an exempt pension. A lump sum payment for a work related injury may also be exempt in certain circumstances, however your fortnightly benefit is not a lump sum injury payment.

Based on the facts of your case, it is considered that the regular fortnightly payments received by you are income according to ordinary concepts. The payments are therefore assessable under subsection 6-5(2) of the ITAA 1997.

Allowable deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

Generally medical expenses have no direct connection to the gaining or producing of assessable income and a deduction is not allowable. Medical expenses are usually a prerequisite to the earning of assessable income and relate to a personal medical condition and are private in nature.

A taxpayer does not satisfy section 8-1 of the ITAA 1997 merely by demonstrating some causal connection between the expenditure and the derivation of income. What must be shown is a closer and more immediate connection. The expenditure must be incurred "in the course of" gaining or producing the assessable income. (Lunney v Commissioner of Taxation (1958) 100 CLR 478.) These principles have been affirmed by the High Court in Commissioner of Taxation v Payne [2001] HCA 3.

In Commissioner of Taxation v. Anstis (2010) 241 CLR 443; (2010) 2010 ATC 20-221; (2010) 76 ATR 735 (Anstis case), the Court considered the deductibility of expenses incurred by the taxpayer in undertaking her study which was a requirement to her receiving the Youth Allowance. It was found that the reason for the taxpayer incurring the expenses was not determinative of the question whether they were incurred in gaining or producing the youth allowance. The occasion of her study expenses was to be found in what she did to establish and retain her statutory entitlement to the receipts.

Your case can be likened to the Anstis case, in that you are required to fulfil certain requirements to continue to be eligible to receive your assessable pension entitlements, namely obtain regular medical reviews. As such, it can be said that the expenses for the reviews are expenses incurred to establish and retain your pension payments. Therefore you are entitled to a deduction for any fees paid to your medical practitioner to receive the required medical review.

Travel to the place of study was not specifically considered in the Anstis case and if it were, the issue of whether or not the travel could be considered to be private in nature would need to have been addressed to determine its deductibility.

The Commissioner's view, as stated in Taxation Ruling IT 2199, is that the expenses incurred in travelling from home to work are not deductible as they are outgoings of a private nature. Expenditure incurred in travelling to work is a prerequisite to the earning of assessable income rather than being incurred in the course of producing that income. Such expenses are incurred as a consequence of living in one place and working in another. That is, the essential character of the expenditure is of a private or domestic nature, relating to personal and living expenses and therefore not an allowable deduction.

Travel undertaken to receive medical treatment for a work-related injury was discussed in Rossitto v. FC of T 98 ATC 2093 (Rossitto). In this case, the taxpayer severely damaged his knee in a work-related injury and liability was accepted for compensation. The taxpayer argued that the cost of regular travel by motor vehicle to his doctor, physiotherapy treatment and specialist doctors was necessarily incurred in deriving the compensation income. He further argued that the payment of compensation was conditional on the maintenance of a rehabilitation program. However, the claim for travel costs failed as they did not have the required nexus with the derivation of assessable income and were found to be of a private or domestic nature. It was difficult to separate the private and personal nature of medical treatment and its relationship with the derivation of income. The case concluded that, in the same way as travelling to a place of employment is not deductible, travel to receive medical treatment, even if it could be said that such medical treatment is a prerequisite to earning income is equally non-deductible.

The difficulty of separating the private nature of receiving medical treatment from the relationship attending the medical practitioner has to the derivation of assessable income is arguably not present if the visit does not involve the receipt of any actual treatment. Where the purpose of the trip is solely to allow a certificate to be issued or a report obtained, as required by the payer of your pension payments, then arguably this is not private in nature and that travel would be deductible.

In your case, you are required to go to obtain regular medical reviews in order to continue getting your pension payments. During some of these visits you do not receive medical treatment.

Where you undertake the travel solely to acquire a medical review/report, as required by entity A, (that is, no actual medical treatment is received) then the cost of that travel is considered to be deductible against the assessable pension payments you receive.

For other travel to your doctors when you receive treatment, no deduction is allowed for the travel or medical fees. As highlighted in the Rossitto case, the cost of travel to receive medical treatment is considered private in nature and not deductible. Accordingly, you are not entitled to a deduction for any travel expenses or fees incurred for your medical treatment.

Lump sum payment in arrears tax offset

Individual taxpayers who receive assessable lump sum payments containing an amount that accrued in earlier income years may be entitled to a tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in the years in which it accrued.

A person is entitled to a lump sum payment in arrears tax offset where:

● the assessable income of the taxpayer of a year of income includes an eligible lump sum, and

● the total arrears amount is not less than 10% of the amount (if any) remaining after deducting the total arrears amount from the normal taxable income of the current year.

Superannuation income streams are included as eligible income (Paragraph 159ZR(1)(c) of the ITAA 1936 and section 12-80 in Schedule 1 to the Taxation Administration Act 1953).

From the information provided in your tax returns, you are entitled to a lump sum in arrears tax offset.