Edited version of private advice

Authorisation Number: 1052080428255

Date of advice: 24 January 2023

Ruling

Subject:Income - lump sum

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: No.

Question 2: Is the Lump Sum Payment you will receive assessable as statutory income under section 6-10 of the ITAA 1997?

Answer: No.

This ruling applies for the following period

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You were injured in your workplace and received weekly payments from the when you were injured until the present time.

You were assessed as being a seriously injured worker under the Return to Work Act 2014 (South Australia) (RWA (SA)).

As a result of legislative changes coming into effect from 1 October 20XX, 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 receiving weekly payments.

You received a letter from Organisation X to inform you about the legislative changes to the RWA (SA) which is summarised as follows:

•         As you had been assessed as a seriously injured worker due to a physical workplace injury, you can elect to receive an economic loss lump sum payment instead of receiving ongoing weekly payments

•         If you elect to receive an economic loss lump sum payment, your entitlement is estimated to be a specified amount

•         If you elect to receive an economic loss lump sum payment:

-       You cannot withdraw your election after it has been received by Organisation X or the claims agent

-       Once your election is received you will continue, unless that entitlement has previously been discontinued, to be paid weekly payments until the date the lump sum payment is made

-       After the lump sum payment is made 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 (the Lump Sum Payment), which you will receive during the ruling period.

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 10-5

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

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

Reasons for decision

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)?

Summary

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

Detailed reasoning

Subsection 6-5(2) of the 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 3 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. As a result, you can elect to receive a lump sum payment for economic loss, rather than weekly payments.

The payments relate to the injury you acquired at work. The Lump Sum Payment you will receive is to compensate you for the fact that you can no longer work in the role following your injury and is to compensate you for the economic loss you have incurred. It is not related to services you have provided in relation to your employment.

The Lump Sum Payment is based on a sum prescribed by statute. It has no relationship to your current or former earnings from your employment. Therefore, the Lump Sum Payment you will receive is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Question 2: Is the Lump Sum Payment you will receive assessable as statutory income under section 6-10 of the ITAA 1997?

Summary

The Lump Sum Payment you will receive relates to your personal injury and any capital gain can be disregarded under paragraph 118-37(1)(a) of the ITAA 1997. Accordingly, the Lump Sum Payment will not be assessable under section 6-10 of the ITAA 1997.

Detailed reasoning

Section 6-10 of the ITAA 1997 outlines that statutory income is not ordinary income but is included in assessable income by specific provisions of the ITAA 1997.

These specific provisions are listed in section 10-5 of the ITAA 1997 and include capital gains, which are included in assessable income by virtue of the capital gains tax provisions.

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.

Capital gains tax

The right to seek compensation is an intangible capital gains tax (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. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged.

The receipt of a lump sum compensation payment may give rise to a capital gain when CGT event C2 occurs, which relates to the satisfaction, surrender, release, discharge or similar ending of an intangible CGT asset.

However, paragraph 118-37(1)(a) of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event relating directly to any of the following is disregarded:

•         compensation or damages you receive for:

-       any wrong or injury you suffer in your occupation, or

-       any wrong, injury or illness you or your relative suffers personally

Application to your circumstances

The Lump Sum Payment you will receive relates to the injury that 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. Your CGT asset will end, being your right, with CGT event C2 occurring when you receive the Lump Sum Payment.

As the Lump Sum Payment relates to your personal injury, any capital gain made in relation to the payment can be disregarded under paragraph 118-37(1)(a) of the ITAA 1997, and accordingly there is no statutory income amount under section 6-10 of the ITAA 1997.

Conclusion

The Lump Sum Payment you will receive is not assessable as either ordinary income or statutory income.

Therefore, you are not required to include the Lump Sum Payment amount in your income tax return in accordance with subsection 6-15(1) of the ITAA 1997.