Edited version of private advice

Authorisation Number: 5010081092035

Date of advice: 13 June 2022

Ruling

Subject: Lump sum compensation payment

Question

Will the receipt of the compensation payment for redemption payments be treated as ordinary assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that are earned, are expected, are relied upon, and have an element of periodicity, recurrence or regularity.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

The assessability of redemption payments under the Return to Work Act has also been considered 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? This TD confirms that redemption payments are assessable income.

Consequently, the lump sum payment received under 'The Agreement' is regarded as assessable income under section 6-5 of the ITAA 1997 as it was for the payment of entitlements to past and future weekly payments. Furthermore, your 20XX PAYG payment summary included the payment as it was assessable when received, in the 20XX financial year.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were previously employed by the Department.

Several years ago you sustained several physical injuries while working for the Department.

Some time later you filed a claim against your employer as part of an ongoing appeal in relation to your injuries previously suffered.

Subsequently you received a further injury while working.

In 20XX you lodged an application challenging your employer's refusal to transfer you from your workplace. This was despite both you and your employer's psychiatrist recommending the transfer.

The Agreement

An agreement was reached and signed in 20XX in recognition of your injuries previously suffered.

A compensation lump sum was paid as part of the signed agreement.

The lump sum payment was broken down as follows:

•         an amount paid in full satisfaction of your entitlements to income maintenance.

•         an amount paid in full satisfaction of your entitlement to payments under section 33 of the Return to Work Act 2014 (South Australia) (RWA).

As part of the signed agreement:

•         you withdrew and ceased all proceeds filed with the Tribunal.

•         you agreed to discontinue any other claims filed by you in any other jurisdiction arising directly or indirectly out of or in connection with the incidents covered by 'The Agreement'.

•         you released the employer and the State from any present or future claims directly or indirectly related to the incidents covered by 'The Agreement'.

•         you resigned your employment.

•         You acknowledged you could not work for the State for a period of 3 years.

You have not worked since your resignation and have been diagnosed by two doctors as having phycological injuries associated with your work.

PAYG Payment Summary

Your 20XX PAYG payment summary included the following payments:

•         an amount for salary and wages.

•         an amount for all your other entitlements such as sick leave.

•         a lump sum payment as per the compensation agreement. This payment was classified as 'workers entitlements to past and future weekly payments.

However, your lump sum payment as per section 33 of the RWA was not included as part of your 20XX PAYG payment summary.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5