Personal injury compensation paid to medically discharged Reserve Force members in respect of lost reservist income arising from injuries sustained while on reservist duty

Is the compensation received by a taxpayer in respect of lost reservist income assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the person is medically discharged as a result of those injuries?

No, compensation received by a taxpayer in respect of lost reservist income is not assessable income under section 6-5 of the ITAA 1997 where the person is medically discharged as a result of those injuries.

The taxpayer was a member of the Army Reserve and was injured during a training exercise. Consequently the taxpayer was unable to work either at their civilian employment or with the Army Reserve. Initially the taxpayer received periodical compensation in respect of the lost civilian employment income and the lost reservist income. As a result of a return to full employment in the civilian job the entitlement to the periodical compensation in respect of the civilian employment income ceased. The taxpayer was subsequently medically discharged from the Army Reserve as a result of the injury. The entitlement to periodical amounts for the lost reservist pay and allowances were subsequently commuted and a lump sum paid.

Division 6 of the ITAA 1997 provides that ordinary income is assessable income unless it is exempt income.

Table items 1.3 and 1.4 of section 51-5 of the ITAA 1997 specifically exempts the pay and allowances (other than pay and allowances for continuous full time service which may instead attract the operation of section 23AD of the ITAA 1936) of members of the Australian Naval Emergency Reserve, the Regular Army Emergency Reserve, the Air Force Emergency Reserve, the Australian Naval Reserve, the Australian Army Reserve and the Australian Air Force Reserve. As periodical compensation is not 'pay and allowances', it is not exempt under these provisions.

The Assistant Treasurer announced on 1 August 2001 a proposed amendment to the taxation law to exempt compensation paid for loss of exempt pay and allowances to Reserve Force members who have to resign as a result of injuries sustained while on duty. The amendment applies to the 1996-97 and later years of income.

The Commissioner will exercise his administrative powers to give immediate effect to the Government's announcement. As a consequence, compensation paid for loss of exempt pay and allowances to reservists who are forced to resign (including by medical discharge) as a result of injuries sustained while on duty is treated as exempt income. The exemption applies to both periodic compensation payments and lump sum commutations of those payments.

If a taxpayer has included a compensation receipt for loss of exempt pay and allowances in a return, they can seek to excise it, subject to the 4 year time limit for amended assessments set by subsection 170(3) of the ITAA 1936. For the 2000-01 and future income years, the time limit is 2 years if the taxpayer is a shorter period of review taxpayer.

The taxpayer's compensation payment in respect of lost reservist income is therefore exempt. Subject to the statutory time limits, the taxpayer will be able to excise any such amounts that have been assessed in previous years.