Edited version of private advice

Authorisation Number: 1052170564013

Date of advice: 10 October 2023

Ruling

Subject: Income - workcover

Question

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

Answer

Yes.

Summary

The redemption payment that you have received is considered to be income according to ordinary concepts, since it represents a recoupment, replacement or compensation for income that would otherwise be derived in the form of weekly payments.

This private ruling applies for the following period:

Year ended X June 20XX.

The scheme commenced on:

X July 20XX.

Relevant facts and circumstances

You were employed at Company A.

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

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

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

You were classified as a 'seriously injured worker' for the purposes of the RWA.

A compensating authority offered to pay you a lump sum of $X pursuant to section 53 of the RWA as redemption of the liability for the weekly payments that were being paid to you.

You accepted this offer on X May 20XX.

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 (South Australia) 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 (South Australia) 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 had undischarged liabilities to make income payments to you under Part 4 of the RWAdue to the injuries you received during your employment.

The payment you received under the Agreement was 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. You signed the agreement on XX May 20XX put forward by The Return to Work Corporation of South Australia, therefore the income tax treatment set out in TD 2016/18 applies to your case.