Issue
Are periodic workers' compensation payments received by a taxpayer for their loss of Army Reserve income, but not arising from injury sustained whilst on reservist duty, included in their assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. Periodic workers' compensation payments received by a taxpayer for their loss of Army Reserve income are assessable income under section 6-5 of the ITAA 1997, as they are not exempt from income tax under section 51-33 of the ITAA 1997.
Facts
The taxpayer was employed as an Army Reserve officer and a state government employee.
The taxpayer received weekly compensation payments from a state government entity as a result of their incapacity for work due to a work related injury.
The taxpayer was not on Army Reserve duty when they sustained the compensable injury. They sustained the injury in the course of their state government employment.
The taxpayer was not required to leave the Army Reserve as a result of their compensable injury.
The weekly compensation payments were not made under the Safety, Rehabilitation and Compensation Act 1988.
Part of the weekly compensation payments related to compensation for the taxpayer's loss of Army Reserve income.
The compensation payments were based on the taxpayer's weekly earnings before they sustained the compensable injury.
The purpose of the compensation payments was to provide an income replacement to compensate the taxpayer for their loss of earnings as a result of their incapacity to work.
Reasons for Decision
Division 6 of the ITAA 1997 provides that the assessable income of an Australian resident for taxation purposes, includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, unless it is exempt income.
Periodic workers' compensation payments paid to an injured employee to compensate them for their loss of earnings due to their incapacity to work, are considered ordinary income and as such, will be assessable income under section 6-5 of the ITAA 1997, unless they are exempt income under section 6-20 of the ITAA 1997. An amount of ordinary income is exempt income if it is expressly exempted from income tax.
Section 51-33 of the ITAA 1997 provides that a compensation payment for the loss of Reserve Defence Force pay and/or allowance is only exempt from tax if all of the following requirements are met: (a) the payment is made under the Safety, Rehabilitation and Compensation Act 1988 in respect of an injury (as defined in that Act) you suffered; and (b) you suffered your injury while serving as a member of the Naval Reserve, Army Reserve or Air Force Reserve (but not while on continuous full time service); and (c) your injury was the sole or dominant reason for you stopping being a member of that Reserve; and (d) your pay and/or allowances were payable for service of a kind described in paragraph (b).
The Explanatory Memorandum to Taxation Laws Amendment Bill (No.2) 2003 , which introduced section 51-33 of the ITAA 1997, explains that compensation payments for the loss of Reserve Defence Force pay and/or allowance are not made exempt from income tax by any other provision of income tax legislation. Accordingly, compensation payments for loss of Reserve Defence Force pay and/or allowance that do not satisfy the requirements of section 51-33 of the ITAA 1997 remain subject to income tax.
The compensation payments made to the taxpayer for their loss of Army Reserve income fail to satisfy the conditions set out in section 51-33 of the ITAA 1997 for the following reasons: • the payments to compensate the taxpayer for their loss of Army Reserve income was not made under the Safety, Rehabilitation and Compensation Act 1988; • the taxpayer's compensable injury was not sustained whilst they were actually serving in the Army Reserve; and • the taxpayer did not resign from the Army Reserve as a result of their compensable injury.
Accordingly, the compensation payments made to the taxpayer for their loss of Army Reserve income are not exempt from income tax.
Therefore, the weekly workers' compensation payments the taxpayer received for their loss of Army Reserve income are assessable income under section 6-5 of the ITAA 1997.