Edited version of private advice

Authorisation Number: 1052085795035

Date of advice: 7 March 2023

Ruling

Subject: Income - commuted lump sum

Question

Is the commuted lump sum payment of your future entitlement to the supplementary allowance paid pursuant of subsection 59(11) of the RTW Act assessable as ordinary income or as a capital gain?

Answer

No. The commuted lump sum payment of your future entitlement to the weekly supplementary allowance paid pursuant to subsection 59(11) of the RTW Act is not assessable as either ordinary or statutory income and you are not required to include the amount in your assessable income.

Note: The back payment of the weekly supplementary allowance, plus the interest on the arrears paid pursuant to subsection 59(9) and section 65 of the RTW Act is assessable as ordinary income in the year of receipt, being the 2023 financial year

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The following orders were made by the Employment Tribunal:

Orders Upon Application for Consent Orders

With the consent of the parties, I make the following orders:

1.    The decision of the respondent dated XX XX 20XX, which reviewed the applicant's weekly payments of compensation pursuant to s xx of the RTW Act, is varied as follows:

1.1  The applicant's new weekly payment is varied to $XXX.XX in lieu of $XXX.XX.

2.    The applicant is entitled to receive that weekly payment up to and including XX XX 20XX thereafter the liability to make weekly payments is commuted as per the below Orders.

3.    Pursuant to s xx of the Employment Tribunal Act, these proceedings are enlarged to include the following question is not presently at issue in the proceedings:

3.1  Noting that the respondent has agreed to the applicant's request to commute her entitlement to weekly payments pursuant to s xx of the RTW Act, what is the quantum of that commutation?

4.    Effective on and from XX XX 20XX (the commutation date), the applicant's application to commute her entitlement to weekly payments made pursuant to section xx of the RTW Act resultant from the death of a deceased worker, is accepted for the capitalised sum of $XXX,XXX.XX (gross) on the basis that:

4.1  The deceased's notional retirement date XX/XX/20XX (when they would have reached XX years of age) gives rise to an actuarial multiplier of XXX.XX, using a X% discount rate pursuant to s xx of the Act and regulation xx of the Work Regulations.

4.2  The capitalised sum referred to above is derived from multiplying the weekly rate of $XXX.XX by XXX.XX.

5.    The respondent agrees to pay the applicants cost agreed in the sum of $X,XXX inclusive of GST and disbursements to be agreed.

Your solicitors acted on your behalf regarding your entitlements pursuant to the RTW Act, and formerly the WRC Actarising from the passing of your spouse, in the course of their employment on XX XX 20XX.

You have been in receipt of weekly payments upon the death of your spouse pursuant to section xx of the RTW Act (and formerly section xx of the WRCA).

You lodged a dispute with the Tribunal in relation to the quantum of weekly payments in accordance with section xx of the RTW Act.

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)(ii)

Reasons for decision

A receipt is assessable income if:

•         it is income in the ordinary sense of the word (ordinary income); or

•         it is not ordinary income but through the operation of the legislation it is included in assessable income (statutory income).

Ordinary Income

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Based on case law, it can be said that ordinary income generally includes receipts that:

•         are earned

•         are expected

•         are relied upon, and

•         have an element of periodicity, recurrence or regularity.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v Dixon (1952) 86 CLR 540).

Section xx of the RTW Act

Compensation in the form of weekly payments is payable to specified dependents under section xx of the RTW Act, if a worker dies as a result of a work injury. The amount of the payment received is based on the worker's average weekly earnings and the extent of the dependency.

Subsection 59(11) of the RTW Act provides that any weekly payments payable under section xx can be commuted to a lump sum payment.

Compensation payable under section xx of the RTW Act is for the loss of the deceased's financial support and not for the loss of the recipient's income.

Where the supplementary allowance amount is paid by way of weekly payments, the regularity of the receipt of those weekly payments means that they are income according to ordinary concepts when received. A lump sum back payment of the supplementary allowance retains the same character as the weekly payments that should have been received previously and therefore is income in nature.

However, when you elect to commute your future entitlement to the weekly payments to a lump sum amount under subsection xx of the RTW Act, the lump sum has no characteristics of ordinary income as it is compensation for the loss of the deceased's financial support rather than for the loss of the recipient's income and it lacks any element of periodicity, recurrence or regularity. Therefore, the amount is capital in nature.

Lump sum payments in arrears of weekly payments and interest on the arrears

Taxation Ruling TR 98/1 deals with the derivation of ordinary income and states that the general rule with non-trading income is that it is derived when it is received.

Subsection 9-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it was derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.

An amount received as a lump sum representing arrears of weekly compensation payments are classified as ordinary income and are assessable in the income year received. This is the case even though the payment relates to earlier income years.

Interest, or amounts received that are in the nature of interest, and which can be identified as interest, and whether paid as part of the compensation or separately, are also assessable in the income year of receipt.

Statutory income

The receipt of the commuted lump sum payment 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)(ii) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong, injury or illness suffered by a person or relative of that person.

In your case, the compensation received is for a wrong, injury or illness you or your relative personally suffers, being the death of a family member.

Therefore, any capital gain or capital loss arising from the CGT event is disregarded under subparagraph 118-37(1)(a)(ii) of the ITAA 1997.

Conclusion

The back payment of the weekly supplementary allowance, plus the interest on the arrears paid pursuant to subsection xx and section xx of the RTW Act is assessable as ordinary income in the year of receipt, being the 20XX financial year.

The commuted lump sum payment of your future entitlement to the weekly supplementary allowance paid pursuant to subsection xx of the RTW Act is not assessable as either ordinary or statutory income and you are not required to include the amount in your assessable income.