Edited version of private advice

Authorisation Number: 1052359444049

Date of advice: 13 February 2025

Ruling

Subject:Lump sum

Question 1

Is the Income compensation component of the redemption settlement payable under th4e relevant WorkersCompensation Act (Compensation Act) included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the Medical and health expenses component of the redemption settlement payable under the Compensation Act included in your assessable income under section 6-5 of the ITAA 1997?

Answer

No.

Question 3

If the answer to question 2 is no, is the Medical and health expenses component of the redemption settlement payable under the Compensation Act included in your assessable income under section 6-10 of the ITAA 1997?

Answer

No.

Question 4

Is the Miscellaneous expenses component of the redemption settlement payable under the Compensation Act included in your assessable income under section 6-5 of the ITAA 1997?

Answer

No.

Question 5

If the answer to question 2 is no, is the Miscellaneous expenses component of the redemption settlement payable under the Compensation Act included in your assessable income under section 6-10 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In a prior year you sustained a personal injury in the course of your employment.

You made a workers compensation claim in relation to that injury, pursuant to the relevant Compensation Act.

Liability for the claim was accepted by your employer's insurer.

As you were incapacitated for pre-injury duties, you have been in receipt of income compensation payments and other statutory entitlements.

The Compensation Act provides that you are entitled to commute these abovementioned entitlements to a lump sum.

The Compensation Act provides that permanent impairment compensation for permanent impairment resulting from a worker's injury is payable only when the employer's liability to the worker for compensation for the injury is commuted by a settlement agreement registered under the Act.

You are considering redemption of your workers compensation claim.

The redemption (i.e. settlement) will be negotiated between you and the insurer and registered with WorkCover.

You have supplied a copy of the Settlement Agreement form, which is the approved form for commuting compensation liabilities by settlement agreement. The form provides that by signing the agreement:

•                     You will have no further entitlement to compensation for the injury when this agreement is registered by the Director; and

•                     You will not be able to claim or receive common law damages for the injury unless your claim is for XXXX impairment compensation only; and

•                     The agreement permanently discharges the liability of the employer to pay compensation to you.

Therefore, your right to receive the payments you have been receiving are being commuted to a lump sum.

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

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.

these redemption payments are also considered to be income according to ordinary concepts, since they represent a recoupment, replacement or compensation for income that would otherwise be derived in the form of weekly payments.

The character of a redemption payment of this kind was considered in Brackenreg V Federal Commissioner of Taxation [2003] AATA 824; 2003 ATC 2196; (2003) 53 ATR 1116 (Brackenreg). There the taxpayer received weekly compensation payments from Comcare, which took into account her normal weekly earnings. Comcare's liability to make these payments was subsequently redeemed for a lump sum. The AAT found that the taxpayer's weekly compensation was income, since it was in substitution for and was paid for loss of earnings; and the character of that compensation did not change upon being redeemed by the payment of a lump sum.

Recent case law, Senior v FC of T 2015 ATC 10-392 has also confirmed that a finalisation payment received as a result of signing a deed of release was a substitute at present value, for a future income stream represented by monthly payments. It was therefore found to be ordinary income within section 6-5 of the ITAA 1997.

You will be receiving a lump sum to extinguish your ongoing benefits representing future income compensation entitlements.

This amount will be ordinary income and required to be declared in the income year it is received.

Lump sum to extinguish your ongoing benefits for future medical expenses entitlements

You will be receiving a lump sum redemption amount to extinguish your ongoing benefits for future medical expenses entitlements.

These are rights of a capital nature and the money you will be receiving 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 will be received as compensation for a 'wrong or injury you have suffered 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 payments will not be assessable as statutory income.

Miscellaneous expenses

Paragraph 3 of TR 92/15 provides that a payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. A requirement that the recipient vouch expenses and refunds unexpended amounts adds weight to the presumption that the payment is a reimbursement rather than an allowance. TR 92/15 also provides that where there is an upper limit of the amount that can be claimed this limit does not alter the character of the payment.

The meaning of the word reimburse includes payments made in advance of expenditure as long as those payments possess the characteristics outlined above.

There is no general principle which establishes that a payment made as a reimbursement of, or compensation for, an expense previously deducted is inherently income, although there are specific statutory provisions dealing with recoupment. In FCT v Rowe 97 ATC 4317 the High Court decided that an ex-gratia lump sum payment by the state government as a reimbursement of costs incurred by a local government employee in connection with an inquiry into his performance was not assessable.

Receipt of a lump sum compensation amount is considered to be in the nature of a reimbursement of an expense. It will not be paid as an allowance or as any of the other kinds of payments in respect of employment or services rendered. The payment will, therefore, not be assessable income under section 15-2 of the ITAA 1997.

The Miscellaneous expenses received by you will not be included in your assessable income and will not be statutory income as you are commuting your entitlement to the payment and it is of a private nature for private expenses.