Private ruling: Lump sum payments
Date of advice: 1 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the payments you received for prior year's income lump sum payments in arrears? | A1: Yes.

Relevant facts and circumstances: You were entitled to receive payments from an income protection claim. Your payments were calculated at a periodical rate. You received lump sums for arrears of the payments. You were not the policy owner.

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

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts. Subsection 159ZR(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines an 'eligible lump sum' as a lump sum payment of eligible income received on or after 1 July 1986 that is included in the assessable income of the taxpayer and accrued, in whole or in part, in an earlier year or years of income. Eligible income is defined in subsection 159ZR(1) of the ITAA 1936 to include income by way of compensation or sickness or accident pay that is: • in respect of an incapacity for work • calculated at a weekly or other periodical rate, and • is not a payment made under an insurance policy to the policy owner. In your case, you received payments under an insurance policy not owned by you, calculated periodically, because you were unable to work for a period of time. Therefore, the payments you received that accrued in earlier years of income meet the definition of a lump sum payment in arrears.