Edited version of private advice

Authorisation Number: 1052380877094

Date of advice: 11 April 2025

Ruling

Subject: Assessable income

Question 1

Are the payments you receive from your insurance provider to be included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

This ruling applies for the following period:

DD MM YY

The scheme commenced on:

DD MM YY

Relevant facts and circumstances

You were involved in a motor vehicle accident on DD MM YY. As a result of that accident, you sustained injuries.

You made a Compulsory Third Party (CTP) insurance claim with your insurance provider for the periods you were unable to work due to the injuries.

Prior to the accident, you were employed.

A letter from your insurance provider outlined the determination of Pre-Accident Weekly Earnings (PAWE). Your insurance provider determined your PAWE to be $XX - based on the weekly average of your gross earnings in the 12 months before your motor accident.

The weekly payments are subject to the minimum and maximum amounts which are defined within the Motor Accident Injuries Act 2017 (NSW).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

An Australian resident's assessable income includes all ordinary and statutory income from all sources, whether in or outside of Australia (sections 6-5 and 6-10 of the ITAA 1997).

Whether a receipt is assessable income in the hands of the recipient depends upon whether it is income or capital. It is the character of the receipt in the hands of the recipient that must be determined and for income tax purposes, a compensation amount generally bears the character of that which it intends to replace.

The Motor Accident Injuries Act 2017 (NSW) establishes a new scheme of compulsory third-party insurance and provision of benefits and support relating to the death of or injury to persons as a consequence of motor accidents.

Division 3.3 of the Act deals with weekly payments of statutory benefits to injured persons. It outlines three entitlement periods for which statutory payments may be made:

•                Section 3.6 deals with weekly payments during the first entitlement period (first 13 weeks after motor accident);

•                Section 3.7 deals with weekly payments during the second entitlement period (weeks 14-78 after motor accident), and

•                Section 3.8 deals with weekly payments after the second entitlement period (after week 78)

Both sections 3.6 and 3.7 confer an entitlement to payments of statutory benefits to an "earner who is injured as a result of a motor accident and suffers a total or partial loss of earnings".

The wording of sections 3.6 and 3.7 is in contrast with the wording of section 3.8 which is reproduced below.

3.8 Weekly payments after second entitlement period (after week 78)

A person who is injured as a result of a motor accident and suffers a total or partial loss of earning capacity as a result of the injury is entitled to weekly payments of statutory benefits ...

Where the damages or compensation are received pursuant to a statutory entitlement, such as under the Act, the question of what the entitlement is for is generally answered by looking to the purpose for which entitlement arises.

The purpose of a statutory payment is of powerful, though not conclusive, assistance to the determination of the character of the payment.

The wording of sections 3.6 and 3.7 "total or partial loss of earnings" clearly indicate that the statutory payments made under those provisions are for loss of earnings and are in substitute for income.

The wording of sections 3.6 and 3.7 are in contrast with those of section 3.8 which refer to the entitlement to statutory compensation being in relation to a "total or partial loss of earning capacity". Such payments have been held to have not been liable to income tax as they are made in relation to the loss or diminution of a capital asset being one's earning capacity.

This view is expressed by the Commissioner in Income Tax Ruling IT 2193: Income tax: compensation for loss of earning capacity where the Commissioner considers the Federal Court judgment in FCT v. Slaven 84 ATC 4077.

In respect of sections 3.6 and 3.7, the quantum of weekly payments is calculated by reference to the person's pre-accident weekly earnings and post-accident earning capacityand implies a substitution for loss of income for those entitlement periods.

A person's "fitness for work" during the first and second entitlement periods is determined having regard to the nature of the injury and the likely process of recovery, treatment and rehabilitation needs, any earnings of the person in any employment after the motor accident and any medical certificate provided regarding the person's fitness for work. These criteria generally relate to loss of earnings or income.

A person's fitness for work after the second entitlement period is determined having regard to the nature of the injury and the likely process of recovery, the treatment provided and rehabilitation undertaken, any medical certificate as to fitness for work and considers additional criteria being, the potential for further treatment and rehabilitation, the person's training, skills and experience and age. These additional criteria are generally relevant to assessing the person's post-accident earning capacity and also relevant to assessing the person's degree of permanent impairment.

The statute provides for different means of assessment for total or partial loss of earnings and total or partial loss of earning capacity. This is demonstrated by:

•                the distinction between statutory benefits for the first two entitlement periods and those payable after the second entitlement period;

•                the additional criteria applicable for 'fitness for work' after the second entitlement period;

•                the continuation of payments past the maximum weekly payment period in the case of pending damages litigation and assessed permanent impairment;

•                the valuation exercise in assessing earning capacity for both pre-accident and post-accident earnings capacity which involve subjective elements.

Noting that periodicity of payments is not determinative, these distinct treatments reflect the underlying differing character of the statutory benefits under sections 3.6 and 3.7 versus section 3.8 of the Act, being that between income ("loss of earnings") and capital ("loss of earning capacity").

In your case, the date of your accident was DD MM YY. On DD MM YYyou received a letter from your insurance provider outlining the determination of your Pre-Accident Weekly Earnings (PAWE). NRMA determined your PAWE to be $XX - based on the weekly average of your gross earnings in the 12 months before your motor accident.

During the XXXX income tax year, you received payments that relate to:

•                Section 3.6 - weekly payments during the first entitlement period (first 13 weeks after motor accident)

•                Section 3.7 - weekly payments during the second entitlement period (weeks 14-78 after motor accident)

These payments are related to your loss of earnings and are intended to compensate you for some of the income you have lost because of your injury. Therefore, the payments you receive under Section 3.6 and 3.7 of the Act are assessable as ordinary income under section 6-5 of the ITAA 1997.