Edited version of private advice

Authorisation Number: 1051566827155

Date of advice: 30 August 2019

Ruling

Subject: Lump sum payment made pursuant to the Return to Work Act 2014 (South Australia) (RWA).

Question 1

Should the amount or any portion paid pursuant to section 53 of the RWA be included in your assessable income?

Answer

Yes.

Question 2

Should the amount of or any portion paid for your resignation, be included in your assessable income?

Answer

Yes.

Question 3

Should the amount of or any portion paid pursuant to section 58 of the RWA be included in your assessable income?

Answer

No.

Question 4

Should the amount of or any portion paid in compensation of legal expenses, be included in your assessable income?

Answer

No.

Question 5

Should the amount of or any portion paid as a retraining allowance, be included in your assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

You were employed with XYZ.

You sustained an injury at work on XX June 20XX.

In accordance with Part 2 Division 5 of the RWA you have been assessed as having X% whole person impairment (WPI).

As the injury resulted in you having a degree of permanent physical impairment, you were entitled to a lump sum payment pursuant to section 58 of the RWA.

Section 58 of the RWA provides an entitlement to a lump sum payment for noneconomic loss for a worker who has been assessed as suffering 5% or more WPI as a result of their work injury, subject to certain exceptions

Subsection 58(4) of the RWA states that the lump sum will be an amount that represents a portion of the prescribed sum calculated in accordance with the regulations.

Non-economic loss is defined in the RWA as:

˗        pain and suffering

˗        loss of amenities of life

˗        loss of expectation of life

˗        disfigurement

˗        any other loss or detriment of non-economic nature

You received $X in settlement of your entitlement pursuant to section 53 of the RWA.

You received $X to resign from XYZ.

You received $X for permanent impairment of X% of the individual, suffered at work, pursuant to section 58 of the RWA.

You received $X in compensation of legal expenses.

You received $X as a retraining allowance.

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, and

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 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.

The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under Capital Gains Tax (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, portions of the lump sum payment you have received is 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.

In your case, you have received a dissected lump sum, with the payment being pursuant to several sections of the RWA.

Therefore, in order to determine the taxation treatment of your lump sum payment the nature of the individual components must be examined.

Question 1

You are in receipt of a redemption of weekly payments to the sum of $X, as an amount paid pursuant to section 53 of the RWA.

Taxation Determination TD 2016/18 "Income tax: is a redemption payment received by a worker under the RWA assessable income of the worker?" provides guidance and explains that payments made under section 53 of the RWA is ordinary income of the worker and is therefore assessable under section 6-5 of the ITAA 1997, in the income year in which it is received.

Therefore, you will need to include in your income tax return the amount that relates to the redemption of your entitlement to future weekly payments under section 53 of the RWA.

Question 2

You received a lump sum payment of $X which was paid to you in an agreement to resign from your employment and that you agree that you have received all entitlements available to you and that you received a payment of $X as consideration for your employment.

This amount is not ordinary income as per section 6-5 of the ITAA 1997, but is a capital gain as per section 6-10 of the ITAA 1997. As this amount is not in compensation for a loss, it cannot be disregarded and is therefore assessable income.

In your income tax return, you are required to include the amount of $X that relates to your resignation from XYZ.

Question 3

You received a lump sum payment of $X, which was paid pursuant to section 58 of the RWA. Section 58 of the RWA entitles a worker to compensation for non-economic loss by way of a lump sum. The amount received is calculated as a proportion of the prescribed sum for the degree of WPI caused by the work injury.

It is a one-off lump sum payment bearing 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 amount of $X is capital in nature and will not be assessable.

Question 4

You received a lump sum payment of $X, which was paid to you to compensate you for the legal fees you incurred due to your claim.

The payment is a one-off lump sum payment bearing 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. The payment is a contribution towards a private expense and therefore, the amount of $X is capital in nature and will not be assessable.

Question 5

You received a lump sum payment of $X, which was paid to you as a retraining allowance. Under the RWA, your employer is required to provide you with employment or compensate you for the loss of employment with a retraining allowance which supports you in returning to employment.

This payment 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.