Edited version of private advice

Authorisation Number: 1052331601024

Date of advice: 21 November 2024

Ruling

Subject: Lump sum compensation payment

Question 1

Is the Settlement Amount you will receive in accordance with the Redemption Agreement under section 42 of the Workers Rehabilitation and Compensation Act 1986 (South Australia) (repealed) (WRCA 1986) assessable income?

Answer 1

No.

Section 42 in the repealed WRCA 1986 related to the redemption of liabilities to a person (the worker) in accordance with an agreement under which the worker would receive a capital payment for either or both of the following liabilities:

•                     liability to pay weekly payments and/or

•                     liability to pay compensation under section 32 of the WRCA 1986 for medical expenses.

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

The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under the capital gains tax (CGT) provisions.

CGT event C2 under section 104-25 of the ITAA 1997 occurs when a CGT asset is cancelled, surrendered or has a similar ending. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under paragraph 118-37(1)(a) of the ITAA 1997 if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer.

Therefore, the payment of the Settlement Amount you will receive in accordance with the Redemption Agreement will not be assessable income as it is neither assessable as ordinary income nor 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 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 WRCA 1986.

Your employment with Company A was terminated.

An offer was made to you by Organisation X as an agent of the Workcover Corporation of South Australia (the Corporation) in relation to the redeeming of your entitlement to future weekly payments and medical and other expenses for a lump sum payment. You declined the offer.

You entered into negotiations for the redemption of undischarged liabilities in relation to the specified injuries you suffered.

A draft agreement (Draft Agreement) has been prepared in relation to the redemption of liability to pay weekly payments and medical and like expenses under section 42 of The Workers Rehabilitation and Compensation Act 1986 (the WRCA 1986)between you and Organisation X as the agent of the Corporation.

Under the Draft Agreement you and the Corporation would agree and acknowledge that the Corporation's undischarged liabilities to make weekly payments and to pay compensation for medical and other expenses would be redeemed by a capital payment of a specified lump sum amount. The lump sum amount would comprise of specified amounts relating to the redemption of liability for weekly payments and an amount for the redemption of any liability for medical and other expenses.

You will agree to receive a specified amount (the Settlement Amount) in accordance with a redemption agreement (the Redemption Agreement) for the redemption of the Corporation's undischarged liabilities to you, which will be paid under section 42 of the WRCA 1986.

You will receive the Settlement Sum in accordance with the 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