Edited version of private advice

Authorisation Number: 1051646656645

Date of advice: 31 March 2020

Ruling

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

Question 1

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

Answer

Yes.

Question 2

Will the amount of or any portion thereof to be paid pursuant to section 54, be included in your assessable income?

Answer

No.

Question 3

Will the amount of or any portion thereof paid as a Retraining Allowance, be included in your assessable income?

Answer

No.

Questions 4

Will the amount of or any portion thereof to be paid pursuant in consideration for execution of a Deed of Release and Discharge, be included in your assessable income?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

·   You were employed.

·   During the course of your employment you sustained injuries in the workplace.

·   You made a claim for compensation through your employer.

·   Your employer rejected your claim.

·   You then took your claim to the South Australia Employment Tribunal (SAET) for review.

·   The SAET set aside and substituted the decision of the your employer with the following:

·   You are entitled to a redemption payment for future medical expenses.

·   You are entitled to a redemption payment for future weekly payments.

·   Your employer has offered you a settlement sum of $x, outlined in a Deed of Release and Discharge which states all parties agree to the payment of:

·   You are entitled to a redemption payment of $x for retraining expenses.

·   You will receive $x for entering into the Deed of Release and Discharge.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-30

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 118-37

Reasons for Decision

Summary

You are required to include in your 20xx income tax return the portion of the lump sum that relates weekly payments and the execution of the Deed of Settlement and Discharge. You are not required to include the portion of the lump sum that relates to medical expenses or retraining expenses.

Detailed reasoning

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable includes ordinary and statutory income (for example, capital gains) derived directly and indirectly from all sources.

To determine the taxation treatment of the lump sum payment you are in receipt of, we must examine the nature of each component.

Ordinary Income

Section 6-5 of the ITAA 1997 refers to ordinary income however does not provide specific guidance on the meaning of ordinary income. Instead we utilise the substantial body of case law which exists and can identify the characteristics of ordinary income. 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.

Weekly Payments

You are in receipt of an amount paid pursuant to section 53 of the RWA which is in redemption of weekly payments.

Taxation Determination (TD) 2016/18 "Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (SA) assessable income of the worker?", states that a payment 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 2020 income tax return the portion of your lump sum that relates to the redemption of your entitlement to future weekly payments under section 53 of the RWA.

Statutory Income

Section 6-10 of the ITAA refers to statutory income (for example, capital gains). The receipt of a lump sum payment may give rise to a capital gain 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.

Medical Expenses

You are in receipt of an amount paid pursuant to section 54 of the RWA which is in redemption of medical expenses.

Section 118-37 of the ITAA refers to compensation and damages payments and states that a capital gain or loss made from a CGT event relating to compensation or damages received for any wrong or injury you suffer in your occupation is disregarded.

Therefore the amount paid pursuant to section 54 of the RWA is statutory income as per section 6-10 of the ITAA however it is disregarded as per section 118-37 of the ITAA.

As the portion of the lump sum paid pursuant to sections 54 of the RWA is not assessable as either ordinary or statutory income, are not required to include the amounts in your assessable income.

Retraining Allowance

You are in receipt of an amount paid for retraining expenses. This portion of the lump sum refers to section 24 of the RWA which outlines the responsibility of the employer to "assist in the training or retraining of a worker". This amount is not ordinary or statutory income and not a compensation payment. This amount will not recur in the future and is a contribution towards a private expense, you are therefore not required to include the amounts in your assessable income.

Execution of a Deed of Settlement and Discharge

You are in receipt of an amount paid for the execution of a Deed of Settlement and Discharge. A payment made to an employee is an ETP if the payment satisfies all the requirements of section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

Based on the information provided, there is a dispute regarding your claim for workers' compensation arising out of your period of employment which has not yet been terminated.

Taxation Ruling TR 2003/13 "Income tax: ETP: payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'" discusses the meaning of the phrase 'in consequence of'.

As per paragraphs 5 and 6 of TR 2003/13, it is clear that but for the termination of employment by resignation on the specified date, the amount of $x would not be paid to you. Although the amount of $100 may be referrable to other undertakings and releases, it is not necessary for termination to be the dominant cause of this payment.

Similarly, although your employment has not yet been terminated and the SAET dispute proceedings do not relate to unfair dismissal, per the reasoning of Heery J in Dibb, the various causes of action to be settled by the Deed and Agreement are now 'interwoven and intertwined' with termination.

Based on the information provided, the $x component of the settlement sum, paid in consideration for the undertakings and releases in the Deed, is considered to be an ETP in accordance with subparagraph 82-130(1)(a)(i) of the ITAA 1997. The payment is assessable as an ETP to the extent that it is not specifically excluded under section 82-135 of the ITAA 1997.

The $x component of the settlement sum is not referrable to a personal injury, or the likely effect of a personal injury on your capacity to derive income from personal exertion.

Accordingly, the exclusion under paragraph 82 135(i) of the ITAA 1997 does not apply in these circumstances.