Edited version of private advice

Authorisation Number: 1051684755558

Date of advice: 27 May 2020

Ruling

Subject: Income tax - assessable income - lump sum compensation payment

Question

Is the lump sum payment you received or any portion thereof pursuant to your states workers compensation legislation, assessable as either ordinary income or as a capital gain?

Answer

No.

This ruling applies for the following period:

Financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You sustained an injury as a result of a workplace incident and you made a claim for compensation pursuant to your states workers compensation legislation (the Act), which was accepted.

When you injury stabilised, you were assessed by a medical practitioner as having a compensable degree of whole person impairment (WPI).

The WPI assessment report was used to determine your lump sum payment entitlements under the Act.

The Act 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 A% and B%) as a result of their work injury, subject to certain exceptions.

The lump sum is determined according to a formula set out in the ACT which 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.

The Act also provided an entitlement to a lump sum payment for non-economic loss for a worker who has been assessed as suffering A% or more WPI as a result of their work injury, subject to certain exceptions. The lump sum represents a portion of the prescribed sum calculated in accordance with the regulations.

Non-economic loss is defined in the Act as:

·         pain and suffering

·         loss of amenities of life

·         loss of expectation of life

·         disfigurement

·         any other loss or detriment of non-economic nature.

It was determined that you were entitled to a dissected lump sum amount representing a portion for the loss of future earning capacity and non-economic loss.

You received payment of the lump sum amount into your nominated back account in the 20XX financial year.

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 your states workers compensation legislation as a result of being assessed as suffering a degree of permanent impairment (being whole person impairment) from a physical injury sustained at work.

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 your 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.