Edited version of private advice

Authorisation Number: 1051881171207

Date of advice: 10 August 2021

Ruling

Subject: Lump sum - compensation

Question

Are the lump sum payments (or any part thereof) which you receive as compensation pursuant to sections 56 and 58 of the Return to Work Act 2014 (SA) assessable to you as ordinary or statutory income?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed as a XXXXXXX in a packing shed a few months prior to your work injury date.

Although your role was primarily driving a XXXX, you would regularly assist the production workers by carrying buckets weighing around 20kg.

You were directed to manually stack boxes weighing around 30kg on pallets. This needed to be done at a fairly rapid rate to keep up with the pace of the machines. This work caused a physical injury to you. You sought compensation under the Return to Work Act 2014 (SA) (RWA).

The Tribunal found that you had suffered an injury to your shoulders and awarded you with compensation.

Based on the Minutes Order issued by the Tribunal in June 20XX:

For the injury you suffered on your one shoulder, it is estimated that you suffered a certain percentage of whole of person impairment in respect of that injury. You were awarded lump sum amounts under sections 56 and 58 of the RWA.

For the injury you suffered on your other shoulder, it is estimated that you also suffered a certain percentage of whole of person impairment in respect of that injury. You were also awarded a lump sum amount under section 58 of the RWA.

Relevant legislative provisions

Income Tax Assessment Act 1997

section 6-5

section 6-10

section 10-5

section 102-5

section 104-25

subsection 108-5(1)

paragraph 118-37(1)(a)

Return to Work Act 2014 (SA)

section 56

section 58

Other references

Taxation Determination TD 2016/18

Taxation Ruling TR 95/35

Reasons for decision

Summary

The lump sum payments (or any part thereof) which you receive as compensation pursuant to sections 56 and 58 of the Return to Work Act 2014 (SA) are not assessable to you as ordinary or statutory income.

Detailed reasoning

Legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Ordinary income

Your assessable income includes income according to ordinary concepts, which is called 'ordinary income' and which you derive directly or indirectly from all sources during the income year - subsections 6-5(1) and (2).

There is no statutory definition 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.

Compensation receipts which substitute for income have been held by the courts to be ordinary income; whereas, compensation paid for the loss of a capital asset is regarded as a capital receipt and not ordinary income and maybe taxable as statutory income.

Statutory income

Your assessable income also includes amounts which are not ordinary income but are included in your assessable income by another provision of the tax law. Such amounts are called statutory income - subsections 6-10(1) and (2).

Section 10-5 lists those provisions. Included in the list is section 102-5 which provides that assessable income includes net capital gains for the income year.

Capital gains tax (CGT)

Taxation Ruling TR 95/35 deals with the CGT treatment of compensation receipts. It states (at paragraph 11) that if an amount is not received in respect of an underlying asset, the amount relates to the disposal of your right to seek compensation.

The right to seek compensation is an intangible CGT asset. Subsection 108-5(1) specifically includes a legal or equitable right within the definition of a CGT asset.

CGT event C2 happens when your right to seek compensation is satisfied, surrendered, released or discharged. The timing of the event is when payment of compensation is made - section 104-25.

However, paragraph 118-37(1)(a) disregards a capital gain made from a CGT event relating directly to compensation or damages received for any wrong or injury you suffer in your occupation or you suffer personally.

Return to Work Act 2014 (SA) (RWA)

Section 56 - lump sum payments - economic loss

Section 56 of the RWA provides an entitlement to a lump sum payment as compensation for loss of future earning capacity for a worker (other than a seriously injured worker) who has been assessed as suffering a degree of whole of person impairment (WPI) (between 5% and 29%) as a result of their work injury, subject to certain exceptions.

The lump sum is determined according to a formula set out in subsection 56(4) of the RWA. The calculation takes into account the prescribed sum that applies in relation to the injured worker's degree of WPI, their age and the proportion of full-time work performed at the time of the injury.

Taxation Determination TD 2016/18 (at paragraph 21) explains that lump sum payments made under section 56 of the RWA do not have the character of ordinary income as they are based on a sum prescribed by statute which bears no relationship to the employee's current or former earnings.

Section 58 - lump sum payments - non-economic loss

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.

Application to your circumstances

In your case, you were awarded a lump sum as compensation pursuant to sections 56 and 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 you sustained at work.

Based on TD 2016/18 (paragraph 21), a lump sum compensation payment made pursuant to section 56 of the RWA does not have the character of ordinary income.

A lump sum compensation payment made pursuant to section 58 of the RWA also does not have the character of ordinary income. The lump sum amount is calculated as a proportion of the prescribed sum for the degree of WPI caused by your work injury. It is a one-off lump sum payment lacking any element of periodicity, recurrence or regularity, and it is not paid to compensate for loss of income. Rather, it is treated as a capital receipt because it is made in satisfaction of your entitlement to seek compensation for the physical injury you suffered at work.

The lump sum amount will be treated as capital proceeds from CGT event C2 that happens to your right to seek compensation at the time payment is made. Any capital gain or loss from the event will be disregarded because the amount is paid as compensation for the physical injury you suffer in your occupation.

Therefore, the lump sum payments (or any part thereof) which you receive as compensation pursuant to sections 56 and 58 of the RWA are not assessable to you as ordinary or statutory income.