Edited version of private advice

Authorisation Number: 1052214055155

Date of advice: 29 January 2024

Ruling

Subject: Lump sum compensation - redemption payment received by a worker

Question 1

Is the lump sum payment you will receive pursuant to section 53 of the RWA assessable as ordinary income?

Answer

Yes.

Question 2

Is the lump sum payment you received pursuant to section 54 of the RWA assessable as either ordinary income or as a capital gain?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You sustained a work-related injury on or around DD MM 20XX.

You made a claim for compensation pursuant to the RWA, which was accepted.

You receive weekly payments of income maintenance and are entitled to receive payments in relation to your medical expenses.

You have been in negotiations with Return To Work SA for the redemption of your entitlement to future weekly payments and future medical and like expenses by payment of a lump sum pursuant to sections 53 and 54 of the RWA.

For the purposes of this ruling, you have asked us to consider redemption of the following undischarged liabilities:

1.    Weekly payments in the sum of $X pursuant to section 53 of the RWA; and

2.    Medical expenses in the sum of $X pursuant to section 54 of the RWA.

You have already received a lump sum for impairment (pain and suffering).

You will receive the lump sum 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 104-25

Income Tax Assessment Act 1997 section 118-37

Reasons for decision

Detailed reasoning

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (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 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 lost income or serve as a substitute for other income are themselves income according to ordinary concepts.

A lump sum payment representing redemption of future weekly payment is also regarded as assessable income. The fact that the payment is received in one lump sum does not change its revenue character. This is consistent with the approach taken by the Commissioner in Taxation Determination TD 93/3 Income tax: is a payment, being a partial commutation of weekly compensation payments, assessable income? As outlined in paragraph 4 of TD 93/3, such a commutation would result in the lump sum remaining assessable, as its effect was simply to pay in advance the future weekly payments.

In your case, you will receive a dissected lump sum, with the payment being pursuant to sections 53 and 54 of the RWA. Therefore, in order to determine the taxation treatment of your proposed lump sum payments the nature of the individual components must be examined.

Section 53 of the RWA

The assessability of redemption payments under the RWA 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 (SA) assessable income of the worker? which states the following:

11. Section 53 concerns the redemption of a liability to make weekly payments under Division 4.

14. A redemption payment received by a worker under section 53 is considered to be ordinary income, included in the worker's assessable income under section 6-5 of the ITAA 1997 in the income year in which it is received.

Therefore, in your case any amount you receive under section 53 of the RWA is assessable as ordinary income under section 6-5 of the ITAA 1997, which will need to be included in your income tax return in the financial year it is received

Section 54 of the RWA

The Commissioner has considered the taxation treatment of amounts paid under section 54 for medical expenses and training allowances in the fact sheet 'South Australian Return to Work Act 2014 - lump sum payments' (the Fact sheet)

Section 54 redemption payments for liabilities associated with medical services - a capital payment made as a result of an agreement you make with the Return to Work Corporation of South Australia (or a self-insurer delegated the powers and directions of the same) to redeem your employer's liability to compensate you for medical services.

In your case, you will receive a lump sum redemption amount pursuant to section 54 of the RWA and the amount received will be in satisfaction of giving up your rights to future medical and other expenses of the kind referred to in section 33 of the RWA. These are rights of a capital nature and the money you received is to compensate you for the relinquishment of these rights will similarly be of a capital nature. Therefore, the payment will not be assessable as ordinary income.

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 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.

In your case, the lump sum payment under sections 54 of the RWA 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 payments will not be assessable as statutory income.

As the lump sum payments pursuant to sections 54 of the RWA are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income. Additionally, as the criteria in subsection 82-135(i) of the ITAA 1997 is satisfied the payment is excluded from being an Eligible Termination Payment.