Edited version of private advice

Authorisation Number: 1051624194995

Date of advice: 7 January 2020

Ruling

Subject: Lump sum payment

Question 1

Will the lump sum payment for redemption of your weekly payments pursuant to section 53 of the Return to Work Act 2014 (South Australia)(RWA) be ordinary assessable income in the year of receipt?

Answer

Yes.

Question 2

Will the lump sum payment for the redemption of future medical expenses pursuant to section 54 of the RWA be assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commenced on

1 July 2019

Relevant facts

You suffered an injury at work.

You have been in receipt of income support under the RWA.

You are considering a redemption of your weekly payments under section 53 of the RWA. The lump sum redemption payment will be approximately $xxx.

You are also considering a redemption of your future medical expenses under section 54 of the RWA. This lump sum redemption payment will be approximately $xxx.

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 118-37

Reasons for decision

Redemption of weekly payments

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

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.

Payments of salary and wages are income according to ordinary concepts and areincluded in your assessable income.

An amount paid to compensate for loss generally acquires the character of that forwhich it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443;10ATD 82). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).

Therefore periodic payments received during a period of total or partial disability are included in your assessable income on the same principle as salary and wages.

Whether the redemption or conversion of an entitlement to periodic payments to a lump sum affects assessability as ordinary income was considered in Brackenreg v. Federal Commissioner of Taxation [2003] AATA 824; 2003 ATC 2196; (2003) 53 ATR 1116. There the taxpayer received weekly compensation payments from Comcare, which took into account her normal weekly earnings. Comcare's liability to make these payments was subsequently redeemed for a lump sum. The AAT found that the taxpayer's weekly compensation was income, since it was in substitution for and was paid for loss of earnings; and the character of that compensation did not change upon being redeemed by the payment of a lump sum. That is, the method of payment does not alter the character of the payment.

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.

Where you receive a lump sum for the redemption of weekly payments under section 53 of the RWA, such a payment is regarded as ordinary assessable income. 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.

Redemption of medical expenses

A payment for medical expenses is not regarded as ordinary assessable income.

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 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.

Where you receive a redemption amount pursuant to section 54 of the RWA and the amount received will be in satisfaction of giving up your rights to future medical expenses, such a payment is capital in nature. Such a lump sum compensation payment for medical expenses is sufficiently related to an injury to be exempt from capital gains under subparagraph 118-37(1)(a)(i) of the ITAA 1997.

Therefore, the amount for the redemption of your medical expenses will not be assessable as ordinary or statutory income and you are not required to include the amount in your assessable income.