Edited version of private advice

Authorisation Number: 1051879585864

Date of advice: 3 August 2021

Ruling

Subject: Workcover lump sum compensation payments

Question

Are the lump sum payment amounts you are due to receive relating to subsections XX and XX of the Return to Work Act 2014 (South Australia) (RWA) assessable as either ordinary income or as a capital gain?

Answer

No.

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with receipts of ordinary income. The payments you are due to receive do not meet the criteria in section 6-5 of the ITAA 1997, therefore they are not ordinary income. It does not operate to include in assessable income amounts of a capital nature. The payment you have received is capital in nature.

Additionally, as the payment is not made in 'in consequence of the termination of your employment' under section 82-130 of the ITAA 1997, the payment is not an Employment Termination Payment.

The other applicable sections, section 15-30 of the ITAA 1997 and the capital gains tax provisions of the ITAA 1997. 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 payments you have received under subsections XX and XX of the RWA 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.

Therefore, the payment will not be included in your assessable income.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

XX XXXX 20XX

Relevant facts and circumstances

You were injured in an accident on XX XXXX 20XX in the course of your employment.

As a result of the significant injuries you suffered in this accident you were not able to return the employment duties you had been undertaking at the time of the accident.

You have reached an agreement with your employer, to release your rights under subsections XX and XX of the Return to Work Act 2014 (South Australia) (RWA), in return for a lump sum compensation payment.

You will receive payments of, $XXX for releasing your rights under subsection XX of the RWA, and $XXX for releasing your rights under subsections XX of the RWA.

As part of this agreement you will resign your employment with this employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-30

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(i)