Edited version of private advice

Authorisation Number: 1051663340679

Date of advice: 23 April 2020

Ruling

Subject: Income Tax - Lump sum compensation payment

Question

Are the lump sum payments you received 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 and made a claim for compensation pursuant to your states workers compensation legislation, which was accepted.

You made an additional claim for compensation at a later date which was rejected by your states workers compensation board.

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

With consent of the parties the application for review was resolved under Orders.

You were found to be entitled to a lump sum payment for the 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 injuries.

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 also found to be entitled to a second lump sum payment for non-economic loss. Where 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 received the payments in the first half of 20XX.

Assumption(s)

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 have received two lump sum payments pursuant to sections 56 and 58 of the RWA as 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.

Section 58 of the RWA entitles a worker to compensation for non-economic loss by way of a lump sum. The amount received 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 pursuant to sections 56 and 58 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.