Edited version of private advice

Authorisation Number: 1052023578463

Date of advice: 25 August 2022

Ruling

Subject: Workcover compensation payment

Question

Will the Workcover compensation payments to cover reasonable medical expenses be included in your assessable income?

Answer

No.

Question

Will the Workcover weekly compensation payments be included in your assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

12 February 20XX

Relevant facts and circumstances

You are employed by XXXX as a XXXX.

You were involved in a Workplace incident on XXXX where you injured your left shoulder.

On XXXX you made a claim against the XXXX Workcover Authority in the Magistrates Court of XXXX, and a payout was made as settlement in your favour.

In accordance with the applicable Workers Compensation Legislation, the Workcover Authority will pay:

a) weekly payments of compensation at the appropriate rate from XXXX to XXXX and not thereafter; together with:

b) the reasonable medical and like expenses with respect to the claimed left shoulder injury only from XXXX to date and ongoing in accordance with the Act.

The settlement and the dismissal of the proceeding is without prejudice to the rights of either party in relation to any claim made by you for impairment benefits or at common law.

Centrelink was reimbursed for any benefits received and $XXXX tax was paid from the settlement.

You have recently had surgery to sever the nerve around your shoulder to help with the pain. This has further reduced mobility.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 25.

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 subsection 6-5(1).

Income Tax Assessment Act 1997 subsection 6-5(2).

Income Tax Assessment Act 1936 subsection 160ZB(1).

Income Tax Assessment Act 1997 paragraph 118-37(1)(a).

Income Tax Assessment Act 1997 paragraph 118-37(1)(b)

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer, includes ordinary income derived directly or indirectly from all sources, during an income year.

The legislation does not provide a definition of 'ordinary income' therefore it is necessary to turn to case law in deciding whether a payment constitutes ordinary income.

Characteristics of 'ordinary income' that has evolved from case law include receipts that have the following characteristics:

•         an element of periodicity, recurrence or regularity

•         the receipt is relied upon, and

•         the receipt is expected.

Income tax treatment of Workcover compensation payments to cover medical expenses

Australian Taxation Office Interpretative Decision ATO ID 2002/423 confirms that a payment received by a taxpayer as compensation for pain, suffering and medical expenses as a result of a personal wrong, injury or illness will not be assessable as ordinary income under section 6-5 of the ITAA 1997, as it does not have the characteristics of income.

The payments you received were not earned by you since they were not obtained in return for your labour done or services rendered. The payments relate to the injury you sustained to your shoulder at work. These payments are do not have the element of periodicity, recurrence or regularity of income receipts, therefore they would not be assessable under subsection 6-5(2) of the ITAA 1997.

Income tax treatment of regular weekly Workcover compensation payments

Generally, amounts paid to compensate for a loss generally acquires the character of that for which it is substituted. Therefore, periodical payments made as compensation or substitute for loss of income as a result of accident or injury is considered ordinary income (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR 1516; Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411;).

In your case, you are in receipt of weekly Workcover compensation payments. These amounts are paid as a substitute for loss of income as a result of your shoulder injury and are considered ordinary income and are therefore assessable under subsection 6-5(2) of the ITAA 1997.