Edited version of private advice

Authorisation Number: 1051782827828

Date of advice: 23 November 2020

Ruling

Subject: Income tax - lump sum compensation payment

Question

Is the lump sum payment for the redemption of the employer's liability for medical expenses paid pursuant to your State workers compensation legislation assessable income?

Answer

No.

Question 2

Is the lump sum payment for non-economic loss paid pursuant to your State workers compensation legislation assessable as either ordinary income or as a capital gain?

Answer

No.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Over a period-of-time you have made multiple claims under your State workers compensation scheme.

Your employer is a registered self-insured employer under the scheme.

The self-insured employer rejected your claim for reimbursement of incurred medical expenses.

Your legal representative lodged an application for review with the State Employment Tribunal to have the decision reviewed.

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

You were found to be entitled to a lump sum payment for non-economic loss based on a whole person impairment (WPI) assessment prepared by a certified medical practitioner. The amount awarded represents a portion of the prescribed sum calculated in accordance with the regulations.

Non-economic loss is defined in the State 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 entered into a separate agreement with the self-insured employer for the redemption of the employer's liabilities under the state's workers compensation legislation and you will receive a lump sum payment for the costs of future medical and like expenses.

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 are to receive lump sum payments pursuant to State 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 payment which is identifiable as a redemption of medical and like expenses is private and personal in nature and not taxable as ordinary income.

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 bearing 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, the payment for non-economic loss is 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 will be 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 and for related medical expenses.

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 payment 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.