Edited version of private advice

Authorisation Number: 1051649241193

Date of advice: 16 April 2020

Ruling

Subject: Lump sum payment made 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 56 of the RWA, be included in your assessable income?

Answer

No.

Question 3

Will the amount of or any portion thereof to be paid pursuant to section 18, be included in your assessable income?

Answer

Yes.

Question

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

Answer

No.

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.

You sustained an injury, 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 your employer.

In accordance with Part 2 Division 5 of the RWA you have been assessed as having a 7% whole person impairment (WPI).

As the injury resulted in you having a degree of permanent physical impairment, you were entitled to two lump sum payments pursuant to sections 56 and 58 of the RWA.

Section 56 of the RWA provides an entitlement to a lump sum payment for loss of future earning capacity for a worker (other than a seriously injured worker) who has been assessed as suffering a degree of WPI (between 5% and 29%) as a result of their work injury, subject to certain exceptions.

The lump sum is determined according to a formula set out in subsection 56(4) of the RWA. The calculation takes into account the prescribed sum that applies to the injured worker's degree of WPI, their age and the proportion of full-time work performed at the time of the injury.

Section 58 of the RWA provides an entitlement to a lump sum payment for non-economic 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.

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

·         You are entitled to a redemption payment pursuant to section 53 of the RWA (future weekly payments).

·         You are entitled to a redemption payment pursuant to section 18 of the RWA (employer's duty to provide work).

·         You are entitled to a redemption payment pursuant to section 56 of the RWA (economic loss).

·         You are entitled to a redemption payment pursuant to section 24 of the RWA (retraining allowance).

·         You will receive an amount for entering into the Deed of Settlement and Discharge.

Upon execution of the Deed of Settlement and Discharge, you will have to resign from the date on which Deed or Order is executed.

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

In your 20XX income tax return you must declare the portion of the settlement sum or amounts paid pursuant to section 53 of the RWA (weekly payments). You do not need to declare the portion of the settlement sum or amounts paid pursuant to section 18 (employer's duty to provide work), 56 (economic loss) or section 24 (retraining).

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.

Employer's Duty to Provide Work

Section 18 of the RWA outlines the employer's responsibility to provide employment to the worker who has been incapacity for work, in consequence of a work injury. You are in receipt of an amount for forfeiting your entitlements outlined in section 18 of the RWA.

Therefore the amount paid pursuant to section 18 of the RWA is capital in nature and will not be assessable as ordinary income.

The receipt of a 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 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, the amount has been received as 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.

As the lump sum payments pursuant to sections 56 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.

Economic Loss

You are in receipt of an amount paid for economic loss and this is a result of being assessed as suffering a degree of permanent impairment (being whole person impairment) from a physical injury sustained at work.

Paragraph 21 of 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, provides guidance on payments made under section 56 of the RWA and explains that lump sum payments made under section 56 do not have the character of ordinary income as they are based on a sum prescribed by statute which bears no relationship to the employee's current or former earnings.

Therefore the amount paid pursuant to section 56 of the RWA is capital in nature and will not be assessable as ordinary income.

As discussed, the receipt of a 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.

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.

As the amount has been received as 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.

As the lump sum payments pursuant to sections 56 of the RWA are not assessable as either ordinary or statutory income, you 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.