Edited version of private advice

Authorisation Number: 1051647984119

Date of advice: 23 March 2020

Ruling

Subject: Compensation payments

Question 1

Will income tax be payable on the capital payment of $XXX to redeem entitlements to 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 capital gains tax be payable on the capital payment of $XXX to redeem entitlements to weekly payments pursuant to section 53 of the Return to Work Act 2014 (South Australia)(RWA)?

Answer

No.

Question 3

Will income tax be payable on the capital payment of $XXX to redeem entitlement payments to compensation under section 33 and medical expenses under section 54 of the Return to Work Act 2014 (South Australia)(RWA) be assessable as ordinary income?

No.

Question 4

Will capital gains tax be payable on the capital payment of $XXX to redeem entitlement payments to compensation under section 33 and medical expenses under section 54 of the Return to Work Act 2014 (South Australia)(RWA)?

Answer

No.

This ruling applies for the following period:

Year Ending 30 June 20XX

The scheme commences on:

1 July 20XX

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 by the nursing home.

You lodged a claim for workers compensation under the return to work Act 2014 in relation your injuries.

By determination, the nursing home rejected your claim.

You lodged an application of Review of the nursing homes', determination to be filed with the South Australian Employment Tribunal (SAET) on XX/month/20XX.

You have been certified unfit for employment duties at the nursing home by a medical practitioner from XXXX to date and on-going.

You will require retraining in order to obtain other suitable alternative employment.

You and the nursing home have agreed to settle their differences on the terms of the attached Redemption Agreement and Deed of Release and Discharge.

The deed of discharge includes the following payments:

·         $XXXX payment of the employment entitlements

·         $XXXX payment for compensation and medical expenses.

You have resigned from your position.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 160ZA(4)

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

Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(i)

Summary

Detailed reasoning

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 are included in your assessable income.

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; (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).

Subsection 160ZA(4) of the Income Tax Assessment Act 1936 applies to reduce any capital gain to the extent that the amount is assessable as ordinary income. A capital gain from a CGT event is reduced to nil under section 118-20 of the Income Tax Assessment Act 1997 if, because of the event, the amount is included in your assessable income under another provision.

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

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.

Compensation / Medical expenses

A lump sum payment received as compensation for a 'wrong or injury you have suffered in your occupation, bares 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. 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 a capital gain or loss is disregarded.

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. Furthermore, medical expenses are a private and personal in nature, the reimbursement of these expenses is also not taxable.