Edited version of private advice

Authorisation Number: 1052317288329

Date of advice: 14 October 2024

Ruling

Subject: Lump sum compensation payments

Question 1

Is the amount you will receive to redeem any liability to weekly payments under section 53 of the Return to Work Act 2014 assessable income?

Answer: 1

Yes.

Question 2

Is the amount you will receive for medical and other expenses under section 54 of the Return to Work Act 2014 assessable income?

Answer: 2

No.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

You suffered serious injuries at your workplace while you were employed by Company A.

Your claim for workers compensation in relation to those injuries was accepted under the Workers Rehabilitation & Compensation Act 1986.

Your employment with Company A was terminated.

In 2015 the Workers Rehabilitation & Compensation Act 1986 was repealed and replaced with the Return to Work Act 2014, with your entitlements to workers compensation continuing under the RTWA 2014.

The relevant State department accepted that you were a seriously injured worker for the purposes of section 21 of the RTWA and you had ongoing entitlement to income support up until the age of XX, in addition to indefinite medical expenses.

Some years after you were injured you received a letter of offer in relation to you redeeming your entitlement to future weekly payments and expenses of the type described in sections 32 and 42 of the Workers Rehabilitation and Compensation Act 1986 for a lump sum payment.

You declined the offer, with negotiations continuing on and off since then with an offer being made just prior to the commencement of the ruling period.

You signed an agreement for the redemption of the liability of the State department to pay amounts under sections 53 and 54 of the Return to Work Act 2014 (the Redemption Agreement), with a specified amount to be paid in relation to each section being provided.

You will receive the amounts provided in the Redemption Agreement 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 section104-25

Income Tax Assessment Act 1997 section 118-37

Reasons for decision

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.

Ordinary income

Section 6-5 of the ITAA 1997 refers to ordinary income however does not provide specific guidance on the meaning of ordinary income. Instead, we utilise the substantial body of case law which exists and can identify the characteristics of ordinary income. 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.

Statutory income

Section 6-10 of the ITAA 1997 refers to statutory income, such as capital gains. The receipt of a lump sum payment may give rise to a capital gain under capital gains tax (CGT) event C2 under 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.

Application to your situation

You will receive the following amounts under the Redemption Agreement:

A specified amount under section 53 of the Return to Work Act 2014

The Redemption Agreement outlines that this amount is being paid to redeem any liability for weekly payments.

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 at paragraph 14 that a payment made under section 53 of the Return to Work Act 2014 is ordinary income of the worker and is therefore assessable under section 6-5 of the ITAA 1997 in the income year in which it is received.

Therefore, the $XX you receive under section 53 of the Return to Work Act 2014 is assessable as ordinary income that needs to be included in your 2024-25 income tax return.

A specified amount under Section 54 of the Return to Work Act 2014

The Redemption Agreement states that this amount is being paid to redeem any liability for medical and other expenses.

You will receive this amount in satisfaction of you giving up your rights to future medical and other expenses. These are rights of a capital nature and the amount you receive is to compensate you for the relinquishment of these rights will similarly be of a capital nature.

Therefore, the amount paid pursuant to section 54 of the Return to Work Act 2014 in accordance with the Redemption Agreement is statutory income under section 6-10 of the ITAA 1997.

CGT event C2 occurred when you entered into the Redemption Agreement and your rights ended. However, any capital gain or loss made when the CGT event C2 happened will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 as the CGT event was in relation to compensation you received for a wrong or injury you suffer in relation to your former employment.

Therefore, any capital gain or capital loss arising from the CGT event C2 will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, and the amount paid under section 54 of the Return to Work Act 2014 will not be assessable as statutory income.