Edited version of private advice

Authorisation Number: 1051792864680

Date of advice: 22 January 2021

Ruling

Subject: Lump sum compensation payments

Question 1

Is the lump sum payment in arrears of your weekly dependency payments and interest on the arrears paid pursuant to sections 59 and 65 of the Return to Work Act 2014 (South Australia) (RWA) assessable income?

Answer

Yes.

Question 2

Is the commuted lump sum payment of your future entitlement to weekly dependency payments paid pursuant to subsection 59(11) of the RWA assessable as ordinary income or as a capital gain?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

As a result of your parent's death, you were found to be entitled to weekly dependency payments pursuant to subparagraph 59(1)(c)(i) of the RWA.

Section 59(1)(c) of the RWA states:

Subject to this Act, if a worker dies as a result of a work injury, compensation in the form of weekly payments is payable as follows:

(c)   a dependent child (not being an orphaned child) is entitled to weekly payments equal to -

(i)  in the case of total dependency - 12.5%;

(ii)   in the case of partial dependency - such lesser percentage as may be fixed by the Corporation having regard to the extent of the dependency,

of the amount of the notional weekly earnings of the deceased worker.

As the making of the weekly dependency payments was delayed pending resolution of a dispute the amount payable in arrears was increased by interest calculated at the prescribed rate in accordance with section 65 of the RWA and the South Australia Return to Work Regulations 2015 (the Regulations).

Section 65 of the RTW Act states: -

65-Augmentation of weekly payment in consequence of delay

(1)  Subject to subsection (2), if-

(a)  a weekly payment, or part of a weekly payment, is not paid as and when required to be paid under this Act; or

(b)  the making of a weekly payment is delayed pending resolution of a dispute under this Act,

any amount in arrears will be increased by interest at the prescribed rate.

(2)  No interest is payable under this section if the delay is attributable to some.

Section 38 of the Regulations state: -

38 - Rate of Interest payable on weekly payments in arrears (section 65 of the Act)

(1)  Subject to subregulation (2), for the purposes of section 65(1) of the Act, the amount in arrears will be increased by interest on the amount at the prime bank rate for the financial year in which the amount went into arrears, compounded on a weekly basis for each complete week that the amount is in arrears.

(2)  If the amount the worker is entitled to be paid relates to more than 1 financial year, those amounts will be increased by interest at the relevant prime bank rate for each financial year, compounded on a weekly basis.

On XX/XX/20XX you received a lump sum payment representing the weekly dependency payment arrears and interest on the arrears.

You have continued to receive the weekly dependency payments on a periodic basis. The ongoing payments have been recorded in your 20XX, 20XX and 20XX income tax returns as assessable income.

You have now elected to commute your future entitlement to these weekly dependency payments to a lump sum under subsection 59(11) of the RWA.

Subsection 59(11) of the RWA states:

A liability to make weekly payments under this section may, on application by the

person entitled to the weekly payments, be commuted to a liability to make a capital payment that is actuarially equivalent to the weekly payments.

The respondent agreed to exercise the discretion in subsection 59(13) of the RWA to commute your weekly payment entitlement and consequently paid you a lump sum in the 20XX income 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)(ii)

Reasons for decision

A receipt is assessable income if:

•         it is income in the ordinary sense of the word (ordinary income); or

•         it is not ordinary income but through the operation of the legislation it is included in assessable income (statutory income).

Ordinary Income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Based on case law, it can be said that ordinary income generally includes receipts that:

•         are earned

•         are expected

•         are relied upon, and

•         have an element of periodicity, recurrence or regularity.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540).

Section 59 of the RWA

Compensation in the form of weekly payments is payable to specified dependents under section 59 of the RWA, if a worker dies as a result of a work injury.

Subsection 59(11) of the RWA provides that any weekly payments payable under section 59 can be commuted to a lump sum payment that is actuarially equivalent to the weekly payments.

Compensation payable under section 59 of the RWA is for the loss of the deceased's financial support and not for the loss of the recipient's income.

Where the compensation is paid by way of weekly payments, the regularity of the receipt of those weekly amounts means that they are income according to ordinary concepts when received. A back payment of weekly payments retains the same character as the weekly payments that should have been received previously and therefore is income in nature

However, when you elect to commute your future entitlement to weekly payments to a lump sum amount under subsection 59(11) of the RWA, the lump sum amount has no characteristics of ordinary income as it is compensation for the loss of the deceased's financial support rather than for the loss of the recipient's income and it lacks any element of periodicity, recurrence or regularity. Therefore, the amount is capital in nature.

Lump sum payments in arrears of weekly payments and interest on the arrears

Taxation Ruling TR 98/1 deals with the derivation of ordinary income and states that the general rule with non-trading income is that it is derived when it is received.

Subsection 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it was derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.

An amount received as a lump sum representing arrears of weekly compensation payments are classified as ordinary income and are assessable in the income year received. This is the case even though the payment relates to earlier income years.

Interest, or amounts received that are in the nature of interest, and which can be identified as interest, and whether paid as part of the compensation or separately, are also assessable income under the general income provisions and is assessable in the income year of receipt.

Statutory income

The receipt of the commuted lump sum payment 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 paragraph 118-37(1)(a) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong, injury or illness suffered by a person or a relative of that person.

In your case, the compensation received is for a 'wrong, injury or illness' you have suffered, being the death of a worker on whom you were dependent.

Therefore, any capital gain or capital loss arising from the CGT event is disregarded under paragraph 118-37(1)(a) of the ITAA 1997 as it relates wholly to compensating you for a personal wrong, injury or illness.

Conclusion

The lump sum in arrears of your weekly dependency payments and the interest on the arrears paid pursuant to sections 59 and 65 of the RWA is assessable as ordinary income in the year of receipt, being the 20XX financial year.

The commuted lump sum payment of your future entitlement to weekly dependency payments paid pursuant of subsection 59(11) of the RWA is not assessable as either ordinary or statutory income, and you are not required to include the amount in your assessable income.