On 10 August 2016, the Commissioner issued this draft Tax Determination, asking: Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (SA) assessable income of the worker? The Commissioner answers, ‘Yes, it is assessable as ‘ordinary income’ under s6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) (see para 1 of the draft determination).
This ruling could well be contentious. Certainly contrary private rulings had been issued and, for that reason, this determination would only be prospective in operation.
These payments are called ‘redemption payments’ as they are lump-sums which the statute allows to replace (redeem) periodic payments for work place injuries, those periodic payments extending for a limited period of time. The periodic payments are are likely to be of an income nature (certainly, the Commissioner thinks so: see para 18). But this draft determination goes on to conclude that the replacement lump-sum is assessable, ordinary income, on the basis that it is a substitute for those assessable periodic amounts (see para 25). The Commissioner cites an AAT case (para 27), where this is what was held: Brackenreg [2003] AATA 824.
This is seems fine, as far as it goes, but there is a well established body of law that says that compensation for loss of income earning capacity (as opposed to compensation for lost income) is not assessable, and is of a capital nature. This is so, even if the quantum of the compensation is calculated by reference to the income the injured person would have earned (and the compensation need not be paid in a single lump sum to be characterised as capital). Therefore, there is a need for ‘fine’ distinctions, which have far reaching consequences (Coward [1999] AATA 132). And so, the Commissioner notes that there is another AAT case that reaches the opposite conclusion, namely: that the redeemed capital payment was capital. The difference, that supposedly made the redeemed amounts capital in nature, was that the redemption was made after retiring age (and thus were not compensating the taxpayer for lost income). Sound convincing? I thought not. So, it seems that the fine distinctions continue.
[ATO website – TD 2016/D1] [LTN 153, 10/8/16]