Edited version of private advice

Authorisation Number: 1051900201859

Date of advice: 20 September 2021

Ruling

Subject: Redemption - retraining allowance

Question 1

Will the amount of $x or any portion thereof to be paid by ReturnToWork SA pursuant to the medical redemption under section 33, and paragraph 54(1)(a) of the RWA, be included in your assessable income?

Answer

No.

Question 2

Will the amount of $x or any portion thereof to be paid by ReturnToWork SA pursuant to a retraining allowance under section 24 of the RWA, be included in your assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2021

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You were previously employed.

You sustained injuries said to have arisen from your employment.

You made a claim for compensation pursuant to the RWA, which was accepted.

You will receive a redemption offer of $x pursuant to section 33 and paragraph 54(1)(a) of the RWA.

You will also receive a retraining allowance in the sum of $x pursuant to section 24 of the RWA.

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)(i)

Income Tax Assessment Act 1997 subsection 82-135(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.

Medical redemption under section 33, and paragraph 54(1)(a) of the RWA

You have received a lump sum redemption amount pursuant to section 54 of the RWA and the amount received will be in satisfaction of giving up your rights to future medical and other expenses of the kind referred to in section 33 of the RWA.

These are rights of a capital nature and the money you received is to compensate you for the relinquishment of these rights will similarly be of a capital nature.

Therefore, the payment will not be assessable as ordinary income.

Retraining allowance under section 24 of the RWA

You are in receipt of an amount paid for retraining expenses. This portion of the lump sum refers to section 24 of the RWA which outlines the responsibility of the employer to "assist in the training or retraining of a worker". This amount is not ordinary or statutory income and not a compensation payment. This amount will not recur in the future and is a contribution towards a private expense.

You are therefore not required to include the amounts in your assessable income.

Statutory income

The receipt of a lump sum compensation 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)(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 under section 54 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.

As the lump sum payments pursuant to section 54 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.

Additionally, as the criteria in subsection 82-135(i) of the ITAA 1997 is satisfied the payment is excluded from being an Eligible Termination Payment.