Private ruling: Lump sum payment
Date of advice: 6 August 2021
Published: October 2021
Ruling period: Year ended 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Can you only be taxed on the income stream equivalent each tax year instead of the whole lump sum in the 2020 income year? | A1: No.

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You made a claim to your insurance company for income protection payments. You were accepted for this claim receiving income protection benefits of $XXXX monthly. Subsequently you were paying tax at your marginal rate of 19% for your income protection income stream. In the 2020 income year you requested the insurance company to make the remaining lump sum payment of $XXXXX in the 2020 income year under an agreement of release and indemnity in which the insurance company accepted this claim with no further cover from the policy. Subsequently this payment would have been spread over the next 20 years and is therefore being taxed in the highest marginal tax bracket for the XXX income year for the remaining lump sum payment. This means you will receive approximately $XXXX less per month to live on for the next 20 years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: Income is derived when you are able to direct how it is dealt with on your behalf (subsection 6-5(4) of the Income Tax Assessment Act (ITAA 1997)). Therefore, a person is taken to have received an amount of income when it is dealt with as they have requested. It is derived at the time the amount is credited and made available for the person to do with as they wish. Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) gives the Commissioner's view as to when income is received. At paragraph 41 it states that for non-trading income, amounts are received when they are in an immediately realisable form. 'Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or a future income period' (paragraph 42 of TR 98/1). The lump sum payment that you received from the insurer in an advance of your future monthly payments is to replace income and will need to be included as part of your assessable income in the financial year in which it was received. We acknowledge your circumstances and associated tax liabilities. However, the Commissioner has no discretion to assess the payment in any other income year than when it was received by you in 2020.

This ruling applies for the following period: