Edited version of private advice

Authorisation Number: 1051807236765

Date of advice: 22 February 2021

Ruling

Subject: Lump sum compensation payment

Question

Is the lump sum payment or any portion thereof paid pursuant to section 58 of the Return to Work Act 2014 (SA) (RWA) 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

You made a claim under the South Australian workers compensation legislation in relation to an injury you sustained whilst undertaking your employment duties.

You have been in receipt of ongoing benefits under the Return to Work Scheme.

The authorised claims agent for the Return to WorkSA requested you attend a permanent impairment assessment to establish whether your injury had stabilised and your entitlement to compensation for non-economic loss.

In accordance with Part 2 Division 5 of the RWA, you were assessed by a certified medical practitioner. In a report prepared by the assessing medical practitioner, it was confirmed that your injury was considered permanent and stable and that you suffered a compensable degree of whole person impairment (WPI)

The authorised claims agent advised you in a letter that they considered your injury to be permanent and stable. They determined that you were entitled to compensation for non-economic loss by way of lump sum payment under section 58 of the RWA, and that they had used the permanent impairment report prepared by the assessing medical practitioner in calculating the lump sum.

Section 58 of the RWA provides an entitlement to a lump sum payment for non-economic loss for a worker who has been assessed as suffering 5% or more WPI as a result of their work injury, subject to certain exceptions.

Subsection 58(4) of the RWA states that the lump sum will be an amount that represents a portion of the prescribed sum calculated in accordance with the regulations.

Non-economic loss is defined in the RWA 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 accepted the authorised claims agent's decision and the lump sum payment was paid into your legal representative's trust account on XX/XX/20XX.

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(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 a lump sum payment pursuant to section 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.

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, the lump sum payment 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 payment has 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 payment will not be assessable as statutory income.

As the lump sum payment pursuant to section 58 of the RWA is not assessable as either ordinary or statutory income, you are not required to include the amount in your assessable income.