Issue
Is the lump sum compensation received by a Reserve Force member in respect of lost civilian income assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year of receipt ?
Decision
Yes. The lump sum compensation received by a Reserve Force member in respect of lost civilian income is assessable income under section 6-5 of the ITAA 1997 in the year of receipt.
Facts
The taxpayer sustained an injury whilst they were a member of the Australian Defence Force Reserve.
The injury resulted in their incapacity to work at their civilian employment.
Initially, the taxpayer received periodical compensation payments in respect of lost civilian income under section 19 of the Safety, Rehabilitation and Compensation Act 1988 (SRCA 1988).
The taxpayer's entitlement to periodical amounts for the lost civilian income was subsequently redeemed by the payment of a lump sum under section 30 of the SRCA 1988.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Based on case law, it can be said that ordinary income generally includes receipts that: • are earned • are expected • are relied upon, and • have an element of periodicity, recurrence or regularity.
The compensation amounts payable under section 19 of the SRCA 1988 were calculated with reference to the employee's weekly earnings before they sustained the compensable injury. The purpose of section 19 of the SRCA 1988 is to provide an income replacement and to compensate the injured employee for their loss of earnings.
Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts ( FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411), and the method of payment does not alter the character of the payment ( Brackenreg v. FC of T 2003 ATC 2196; Case X21 90 ATC 239; Case K34 10 TBRD 187).
The periodical compensation payments initially received by the taxpayer were income according to ordinary concepts (ATO Interpretative Decision ATO ID 2001/553).
The taxpayer's entitlement to ongoing fortnightly compensation payments was redeemed, pursuant to section 30 of the SRCA 1988, by the payment of a lump sum amount. The lump sum payment, being a commutation of fortnightly compensation payments for loss of earnings, is also income according to ordinary concepts (Taxation Determination TD 93/58).
This is consistent with the approach taken by the Commissioner in Taxation Determination TD 93/3 which deals with the partial commutation of periodic payments to a lump sum.
The taxpayer has received the lump sum in the current income year and has therefore derived that income at that time for the purposes of section 6-5 of the ITAA 1997 (Taxation Ruling TR 98/1).
Accordingly, the lump sum compensation received by the taxpayer, a Reserve Force member, in respect of lost civilian income is ordinary income and assessable under section 6-5 of the ITAA 1997 in the income year in which they received the payment.