Edited version of private advice

Authorisation Number: 1051808173281

Date of advice: 25 February 2021

Ruling

Subject: Lump sum compensation payments

Question

Will the commuted lump sum payment of your future entitlement to weekly payments paid pursuant to subsection 59(11) of the Return to Work Act 2014 (SA) (RWA) be assessable as 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

As a result of your spouse's death, you have been in receipt of ongoing weekly payments pursuant of section 59 of the RWA.

Paragraph 59(1)(a) of the RWA states:

(1)  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:

(a) a dependent spouse or domestic partner is entitled to weekly payments equal to -

(i)    in the case of total dependency - 50%;

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

of the amount if the notional weekly earnings of the deceased worker;

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.

An in-principle agreement has been reached between you and your deceased spouses' employer to pay you a lump-sum to commute its ongoing liabilities to you for the weekly payments under subsection 59(11) of the RWA.

You are still in the process of having the documentation finalised.

The commuted lump sum payment will be received in the 20XX financial year.

Relevant legislative provisions

Income Tax Assessment Act section 6-5

Income Tax Assessment Act section 6-10

Income Tax Assessment Act section 104-25

Income Tax Assessment Act paragraph 118-37(1)(a)

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).

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).

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. The amount of the payment received is based on the worker's average weekly earnings and the extent of the dependency.

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

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 amount is paid as weekly payments, the regularity of the receipt of those weekly amounts means that they are income according to ordinary concepts when received.

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 has no characteristics of ordinary income as it is compensation for the loss of the deceased's financial support rather than the loss of the recipient's income and it lacks any element of periodicity, recurrence or regularity. Therefore, the amount is capital in nature.

The receipt of the commuted lump sum payment amount may give rise to a capital gain (statutory income) under capital gains tax (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)(ii) 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 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 subparagraph 118-37(1)(a)(ii) of the ITAA 1997.

Conclusion

The commuted lump sum payment of your future entitlement to weekly payments paid pursuant to 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.