Edited version of private advice

Authorisation Number: 1052213576608

Date of advice: 29 January 2024

Ruling

Subject: Compensation - lump sum payment

Question 1

Is the lump sum payment you will receive in relation to the Redemption Agreement under section 42 of the Workers' Rehabilitation and Compensation Act 1986 (South Australia) (WRCA 1986) assessable as ordinary income?

Answer

No.

It is accepted by the Commissioner that the compensation payment you will receive in accordance with section 42 of the WRCA 1986 is capital in nature and not assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Insurance or indemnity for loss of assessable income does not apply to the payment (Section 15-30 of the ITAA 1997).

The receipt of a lump sum compensation 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)(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.

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 periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You have been in receipt of weekly payments of income maintenance pursuant to Division 4 of the WRCA 1986 and compensation for medical and other expenses of the kind referred to in section 32 of the WRCA 1986 from Employers Mutual (as an agent of the Workcover Corporation of South Australia) ('the Corporation').

On or around DD MM 20XX, the Workcover Corporation of South Australia invited you to consider redeeming your future weekly payments and future medical expenses by payment of a lump sum pursuant to section 42 of the WRCA 1986.At the time, you did not accept the offer.

In MM 20XX, you reached an agreement with the Corporation which covers liability for the compensable injuries you suffered while employed by Company X. The dates of these injuries are DD MM 19XX, DD MM 19XX, DD MM 19XX, DD MM 19XX, DD MM 19XX, DD MM 19XX.

The agreement is for a lump sum payment of the redemption of the following undischarged liabilities:

1.    Weekly payments in the sum of $X pursuant to section 32 of the WRCA 1986; and

2.    Medical expenses in the sum of $X pursuant to section 42 of the WRCA 1986.

One lump sum payment will be made to you of $ X under section 42 of the WRCA 1986.

You will receive this payment during the ruling period.

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 15-30

Income Tax Assessment Act 1997 section 118-37(1)