Edited version of private advice

Authorisation Number: 1052072708911

Date of advice: 22 December 2022

Ruling

Subject: Assessable income - lump sum payment

Question 1

Is the lump sum payment you will receive assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Is the lump sum payment you will receive assessable as statutory income under section 6-10 of the ITAA 1997?

Answer 2

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You injured yourself in the course of your employment, resulting in you requiring surgery.

The injury occurred several years ago.

You have been assessed as a seriously injured worker under section 21 of the Return-to-Work Act 2014 (South Australia) (RWA (SA)).

You currently receive weekly payments for economic loss under the section 41 of theRWA (SA).

As a result of recent legislative changes, subject to section 56A of the RWA (SA), a seriously injured worker may now elect to receive a lump sum payment under section 56 of the RWA (SA) instead of weekly payments.

If you elect to receive an economic loss lump sum payment, your entitlement will be calculated using the following formula:

Prescribed sum x Age factor(age on election date) x hours worked when injured

Once an election has been received by RTW SA or the claims agent, you cannot withdraw it.

If the lump sum is paid, you will no longer be entitled to receive:

•         Weekly payments for your injury/injuries

•         Recovery and/or return to work services for your work injury/injuries

•         Any further economic loss lump sum payments or redemption of income support

•         To make another election in the future, even in relation to a new injury

You will make an election to receive the payment as a lump sum in the near future.

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 6-15

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 paragraph 118-137(1)(a)

Reasons for decision

Question 1

Summary

The compensation payment you will receive is not assessable as ordinary income.

Detailed reasoning

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.

Ordinary income generally includes the following three categories: income from rendering personal services, income from property and income from carrying on a business.

There is no definition of 'ordinary income' within the legislation, so it is necessary to look to case law for the characteristics of ordinary income.

Ordinary income generally has the characteristics of being relied upon, expected and an element of periodicity, recurrence, or regularity. Even when these characteristics are present, an amount received may still not be ordinary income.

It is generally the nature of a payment that determines if it is ordinary income. Where a payment is made to compensate for loss of income or serve as a substitute for other income, such a payment will be considered to be ordinary income.

Application to your circumstances

You have been classified as a seriously injured worker in accordance with section 21 of the RWA (SA). As a result, you can elect to receive a lump sum payment for economic loss, rather than weekly payments.

The payments relate to an injury you acquired at work.

The payment you will receive is to compensate you for the fact that you can no longer work in the role following your knee injury. It is to compensate you for the economic loss you have incurred and is not related to services provided,

The payment you will receive is based on a sum prescribed by statute. It has no relationship to your current or former earnings from your employment. Therefore, the payment you will receive is not assessable as ordinary income.

Question 2

Summary

The compensation payment you will receive relates to personal injury and any capital gain can be disregarded under paragraph 118-37(1)(a) of the ITAA 1997.

Detailed reasoning

The right to seek compensation is an intangible CGT asset, being a legal or equitable right that is not property. The right is acquired at the time the wrong or injury occurs and includes all of the rights arising during the process of pursuing the compensation claim.

CGT event C2occurs when the right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged.

As a result of CGT event C2 occurring, you may incur a capital gain.

Paragraph 118-37(1)(a) of the ITAA 1997 provides that a capital gain or capital loss you make from a capital gains tax event relating directly to any of these is disregarded:

(a)         compensation or damages you receive for:

i.  any wrong or injury you suffer in your occupation, or

ii. any wrong, injury or illness you or your relative suffers personally

Section 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income or statutory income, it is not assessable income.

Application to your circumstances

The lump sum payment you will receive relates to an injury you acquired in your workplace. As a result of receiving the lump sum payment, you are giving up your right to seek further compensation in relation to the injury. As the lump sum payment relates to a personal injury, any capital gain can be disregarded.

As the lump sum payment you will receive is not assessable as either ordinary income or statutory income, you are not required to include the amount in your income tax return.