Edited version of private advice

Authorisation Number: 1052200232604

Date of advice: 15 December 2023

Ruling

Subject:Lump sum compensation payments - workers compensation and redemption settlement

Question 1

Will the monies received on election under section 56A of the Return to Work Act 2014 (SA) (RWA) be subject to income tax or capital gains tax?

Answer 1

No.

The assessable income of a taxpayer includes ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and statutory income under section 6-10 of the ITAA 1997 such as capital gains. Redemption payments are ordinary income in the year of receipt.

However, Taxation Determination TD 2016/18 Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (SA) assessable income of the worker? states that a payment made pursuant to statutory compensation provisions dealing specifically with loss of future earning capacity such as those in section 56 of the RWA do not have the character of ordinary income. This is because they are based on a sum prescribed by statute which bears no relationship to the employee's current or former earnings.

The lump sum payment you will receive under sections 56A of the RWA is for loss of future earning capacity and is calculated under section 56 of the RWA. Specific eligibility for section 56A is the Whole Person Impairment (WPI) of 50% or more.

Therefore, the lump sum payment you will receive under section 56A of the RWA is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Further, the compensation payment relates to personal injury, and any capital gain can be disregarded under paragraph 118-37(1)(a) of the ITAA 1997 as 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.

Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payment will not be assessable as statutory income.

Question 2

Is the lump sum redemption of future medical expenses under section 54 of the Return to Work Act 2014 (SA) subject to income tax or capital gains tax?

Answer 2

No.

It is accepted by the Commissioner that the compensation payments you will receive in relation to section 54 of the RWA is not assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not assessable as statutory income under section 6-10 of the ITAA 1997.

As mentioned above, the compensation payment relates to personal injury, and any capital gain can be disregarded under paragraph 118-37(1)(a) of the ITAA 1997 as a capital gain or capital loss you make from a capital gains tax event relating directly to any of these is disregarded:

(b)          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.

Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payment will not be assessable as statutory income.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You sustained an injury because of a work incident.

As a result of the incident, you made a claim for compensation pursuant to the South Australia's workers compensation legislation.

You have a proposed election notice to receive a lumpsum under section 56A of the RWA.

You have a redemption of liability agreement as per section 54 of the RWA for medical expenses.

In accordance with Part 2 Division 5 of the RWA, you were assessed by a certified medical practitioner. In a report prepared by the assessing medical practitioner, it was confirmed that your injury was considered permanent and stable and that you suffered a compensable degree of whole person impairment (WPI)

As the injury resulted in you having a degree of permanent physical impairment, you were entitled to lump sum payments pursuant to sections 56 of the RWA.

This is a lump sum payment for loss of future earning capacity for a worker who is a seriously injured worker who has been assessed as suffering a degree of WPI.

The estimated entitlements are approximately $XXX under section 56A of RWA depending on the date of the claim.

The estimated redemption of future medical expenses is approximately $XXX as per section 54 of RWA.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

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