Edited version of private advice

Authorisation Number: 1052156954602

Date of advice: 21 August 2023

Ruling

Subject: Income - work cover compensation

Question

Will the receipt of the redemption payment made pursuant to section 53 of the Return to Work Act 2014 (XX) (RWA) be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending X June 20XX

The scheme commenced on:

X July 20XX

Relevant facts and circumstances

You were employed at X.

You suffered injuries as a result of an incident in the course of your employment in 20XX.

You are classed as a 'seriously injured worker' for the purposes of the RWA.

You are presently entitled to weekly payments and payments of medical expenses with respect to your work injuries.

You and the compensating authority began negotiations concerning redemption of your entitlements to weekly payments, and payment of medical expenses, with respect to the injuries in 20XX.

The compensating authority has offered to pay you a lump sum of $XX pursuant to section 53 of the RWA as redemption of the liability for the current weekly payments being paid to you.

The agreement is yet to be signed by either yourself or the compensating authority.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Section 6-5 and section 6-10 of the 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 assessability of redemption payments under the Return to Work Act 2014 (XXX) has been considered by the Commissioner in Taxation Determination TD 2016/18 Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (XXX) assessable income of the worker?

These redemption payments are also considered to be income according to ordinary concepts, since they represent a recoupment, replacement or compensation for income that would otherwise be derived in the form of weekly payments.

The character of a redemption payment of this kind was considered in Brackenreg v. Federal Commissioner of Taxation [2003] AATA 824; 2003 ATC 2196; (2003) 53 ATR 1116. There the taxpayer received weekly compensation payments from Comcare, which took into account her normal weekly earnings. Comcare's liability to make these payments was subsequently redeemed for a lump sum. The AAT found that the taxpayer's weekly compensation was income since it was in substitution for and was paid for loss of earnings. The character of that compensation did not change upon being redeemed by the payment of a lump sum.

Application to your situation

The compensating authority presently has undischarged liabilities to make income payments to you under Part 4 of the RWA) due to the injuries you had experienced during your employment.

The payment you will receive under the Agreement will be paid to redeem those liabilities pursuant to section 53 of the RWA.

Therefore, in accordance with the principles contained in TD 2016/18, any portion of the payment you received that relates to the payment of an amount under section 53 of the RWAwill be ordinary income pursuant to section 6-5 of the ITAA 1997.

It should be noted that at paragraph 4 of TD 2016/18, it states:

Therefore, this Determination only applies to redemption payments made under agreements entered into on or after 10 August 2016 (the date of issue of draft Taxation Determination TD 2016/D1).

For the purposes of this ruling, the term 'agreement' is considered to be the contractual agreement between the two parties that is entered into upon the signing of the written agreement. At present, you are yet to sign the agreement put forward by The Return to Work Corporation of XXX, therefore the income tax treatment set out in TD 2016/18 applies to your case.