Private ruling: Back payment of salary
Date of advice: 15 December 2015
Published: February 2016
Ruling period: Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Do you include back payment of wages in your taxable income for the period ending 30 June 2015 even though you received the payment in July 2015? | A1: No.

Relevant facts and circumstances: You have received back payment of salary. This back payment was for a period in the previous financial year. You received this back payment in the current financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1936 Section 159ZRA | Income Tax Assessment Act 1936 Subsection 159ZRA(1)

Reasons for decision: Summary: Section 6-5 of Income Tax Assessment Act 1997 (ITAA 1997) states your assessable income includes ordinary income derived directly or indirectly from all sources during the income year. A lump sum payment is generally classified as ordinary income if it is simply a lump sum made up of periodic income payments but paid in arrears to cover a certain period. The payment substitutes income and has been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR 1516). The payment retains the characteristics of ordinary income even though paid as a lump sum. Taxation Ruling TR 98/1 states where the compensation amount is considered to be income under ordinary concepts; it is assessable in the income year it is received for the purposes of section 6-5 of the ITAA 1997, even though the payment may relate to a past or future income period. In your case, the lump sum payment was for back payment of salary. It is considered to be ordinary income as it acquires the character of the income for which it substituted. This lump sum was received in the following financial year. Accordingly, the amount you received is ordinary income that is fully assessable in the income year it was received, being the current financial year. Lump sum in arrears tax offset. Individual taxpayers, who receive certain assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in each of the years in which it accrued. To be eligible income, the salary and wages must have accrued during a period ending more than 12 months before the date in which they are paid. In your case, the back payment of salary was received less than 12 months after the period during which it accrued. You are therefore not entitled to a lump sum in arrears tax offset.