Periodical personal injury compensation paid to Reserve Force members in respect of lost civilian employment income arising from injuries sustained while on reservist duty

Is the periodical compensation received by a taxpayer in respect of lost civilian employment income assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the periodical compensation received by a taxpayer in respect of lost civilian employment income is assessable income under section 6-5 of the ITAA 1997.

The taxpayer was a member of the Army Reserve and was injured during a training exercise. Consequently the taxpayer was unable to work at either 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.

Employment income is ordinary income and as such assessable income, unless specifically exempt from tax. Workers' compensation, which is a periodical receipt received in lieu of employment income where a worker sustains an injury which entitles them to compensation, is also ordinary income and as such assessable income, unless specifically exempt from tax.

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. This amendment to the law only applies to compensation that replaces the specified exempt income.

As there is no exemption for the civilian employment income, the periodical compensation payments are assessable under section 6-5 of the ITAA 1997.