Edited version of private advice

Authorisation Number: 1052205103640

Date of advice: 8 January 2024

Ruling

Subject: Lump sum compensation payments - workers compensation

Question

Will the lumpsum payment you will receive under section 56 and section 58 of the Return to Work Act 2014 South Australia (RWA) be subject to income tax or capital gains tax?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1July 20XX

Relevant facts and circumstances

You were employed by XX.

You sustained injury because of a work incident.

You made a claim under the Return to Work Act 2014 (SA) (RWA) in relation to an injury you sustained whilst undertaking your employment duties.

You have been in receipt of ongoing benefits under the Return to Work Scheme.

In accordance with Part 2 Division 5 of the RWA, you were assessed by a certified medical practitioner, XXX. 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).

Your estimated entitlement is $XXX under section 56A of RWA.

Your estimated entitlement is $XXX under section 58 of RWA.

You will not return to work.

The claim for the compensation has been accepted as being pursuant to the RTW Act and was ceased pursuant to the time limit.

The agreement has not yet been executed.

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)(i)

Reasons for decision

The assessable income of an Australian resident 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.

Ordinary Income

The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies its likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income, as are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for loss of income or serve as a substitute for other income are themselves income according to ordinary concepts. Therefore, Workers' compensation payments are ordinary income in the year of receipt because it is for the loss of income.

In your case, the receipt of lump sum payments pursuant to sections 56 and section 58 of the RWA as a result of being assessed as suffering a degree of permanent impairment was from a physical injury sustained at work.

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.

Section 58 of the RWA provides an entitlement to a lump sum payment for non-economic loss for a worker who has been assessed as suffering 5% or more WPI as a result of their work injury, subject to certain exceptions. This is a one-off lump sum payment bearing none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity, and nor is it paid to compensate for loss of income.

Subsection 58(4) of the RWA states that the lump sum will be an amount that represents a portion of the prescribed sum calculated in accordance with the regulations.

As with payments made under section 56, payments made under section 58 have no relationship to the employee's current or former earnings.

Therefore, the lump sum payments are capital in nature and will not be assessed as ordinary income under section 6-5 of the Income Tax Assessment Act 1997.

Statutory Income

The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which related to cancellation, surrender or similar endings. However, a capital gains 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)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation.

In your case, the lump sum payments have been received as compensation for a 'wrong or injury you have suffered in your occupation', being the loss of body functionality in respect of your workplace injury.

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.

As the lump sum payments pursuant to section 56 and section 58 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.