Edited version of private advice

Authorisation Number: 1051528093795

Date of advice: 12 June 2019

Ruling

Subject: Compensation

Question

Will the lump sum payment made pursuant to section 59 of the Return to Work Act 2014 (SA) (RWA) be assessable as ordinary or statutory income?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

In 20XX, your late spouse sustained an injury in the course of their employment which resulted in their death.

You are entitled to and have received weekly payments pursuant to section 59 of the RWA.

Paragraph 59(1)(a) of the RWA states:

(1) Subject to this Act, if a worker dies as a result of a work injury, compensation in the form of weekly payments is payable as follows:

(a) a dependent spouse or domestic partner is entitled to weekly payments equal to -

(i) in the case of total dependency - 50%

(ii) in the case of partial dependency - such lesser percentage as may be fixed by the Corporation having regard to the extent of the dependency,

Of the amount of the notional weekly earnings of the deceased worker;

You and the employer agreed to commute your future entitlement to these weekly payments to a lump sum under section 59(11) of the RWA.

Subsection 59(11) of the RWA states:

A liability to make weekly payments under this section may, on application by the person entitled to the weekly payments, be commuted to a liability to make a capital payment that is actuarially equivalent to the weekly payments.

You accepted a commutation payment of $X during the 2018-19 income year.

Relevant legislative provisions

Income Tax Assessment Act section 6-5

Income Tax Assessment Act section 6-10

Income Tax Assessment Act section 104-25

Income Tax Assessment Act paragraph 118-37(1)(a)

Income Tax Assessment Act subsection 82-130(1)

Income Tax Assessment Act section 80-10

Reasons for decision

Ordinary Income

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer 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

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.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v Dixon (1952) 86 CLR 540).

Section 59 of the RWA provides for weekly compensation payments to be payable to various specified dependents where a worker dies as a result of a compensable disability.

Subsection 59(11) of the RWA provides that any weekly payments payable under section 59 can be commuted to a lump sum payment that is actuarially equivalent to the weekly payments.

Compensation payable under section 59 of the RWA is for the loss of the deceased's financial support, it is not compensation payable for the loss of your income. Therefore the amount is capital in nature.

Where the compensation amount is paid by way of weekly payments, the regularity of the receipt of those weekly amounts means that they are income according to ordinary concepts when received.

However, when you elect to commute those weekly payments to a lump sum amount under subsection 59(11) of the RWA, the lump sum amount has no characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity.

Therefore, the lump sum amount will be capital in nature, being a payment for the loss of financial support, and will not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Statutory income

Employment termination payment (ETP)

Section 80-10 of the ITAA 1997 states:

For the purposes of this Part, treat the termination of employment as including:

(a) retirement from employment; and

(b) the cessation of employment because of death.

Subsection 82-130(1) of the ITAA 1997 states:

A payment is an employment termination payment 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.

Having regard to all your circumstances it is accepted that the lump sum amount you received in consequence of electing to commute your entitlement to weekly payments under the RWA is not an ETP.

Capital Gains Tax

The receipt of the 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 paragraph 118 37(1)(a) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong, injury or illness suffered by a person or a relative of that person.

In your case, the compensation received is for a 'wrong, injury or illness' you have suffered, being the death of a worker on whom you were dependent.

Therefore, any capital gain or capital loss arising from the CGT event is disregarded under paragraph 118-37(1)(a) of the ITAA 1997 as it relates wholly to compensating you for a personal wrong, injury or illness.

As the lump sum payment pursuant of section 59 of the RWA is not assessable as either ordinary or statutory income, you are not required to include the amount in your assessable income.