Edited version of private advice

Authorisation Number: 1051660309861

Date of advice: 20 April 2020

Ruling

Subject: Income tax - lump sum compensation payment

Question 1

Is the lump sum payment or any portion thereof in respect of the redemption of medical expenses, under your states workers compensation legislation assessable income?

Answer

No.

Question 2

Will the lump sum payments for the loss of future earning capacity and non-economic loss assessable as either ordinary income or as a capital gain?

Answer

No.

This ruling applies for the following periods:

Financial year ending 30 June 20XX

Financial Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You sustained an injury as a result of a work incident.

As a result of the incident, you made a claim for compensation pursuant to your states workers compensation legislation, which was accepted.

You made a further claim for compensation at a later date.

The self-insured employer rejected your second claim.

You made an application for review in your states Employment Tribunal (ET) to have the decision reviewed.

The application for the review was resolved under a standard form of Order.

It was found that you had sustained an injury as reported in your first claim and that no entitlement to compensation arises therefrom apart from that set out in the Orders.

You were found to be entitled to a lump sum payment for loss of future earning capacity, as you had been assessed as suffering a degree of whole of person impairment (WPI) as a result of the injury.

The lump sum is determined according to a formula set out in the states workers compensation legislation. 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.

You were found to be entitled to a second lump sum payment for non-economic loss. Were the amount awarded represents a portion of the prescribed sum calculated in accordance with the regulations.

Non-economic loss is defined in the states workers compensation legislation 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 were also found to be entitled to be compensated for the costs of future medical and like expenses in consequence of the claimed work injuries and you have entered into a separate agreement with the employer for the redemption of the employer's liabilities under the state's workers compensation legislation.

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 104-25

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 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.

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.

In your case, you will received two lump sum payments as a result of being assessed as suffering a degree of permanent impairment (being whole person impairment) from a physical injury sustained at work as well as a lump sum payment for the redemption of future medical and like expenses.

As medical expenses are private and personal in nature, the lump sum paid for the redemption of medical expenses is not taxable.

The lump sum payment for loss of future earning capacity does not have the character of ordinary income as it is based on a sum prescribed by statute which bears no relationship to the employee's current or former earnings.

The lump sum payment for non-economic loss 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 baring 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, both lump sum payments are capital in nature and will not be assessable as ordinary income.

Statutory 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 lump sum payments have 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 are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.