Private ruling: Income protection payments
Date of advice: 24 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the lump sum payments in arrears included in your assessable income in the 2016-17 income year? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision: Summary: Income protection payments Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). In your case you have received income protection payments following a workplace injury. Taxation Ruling TR 98/1 considers the appropriate method of determining when income is derived under subsection 6-5(2) of the ITAA 1997 where income is earned in one tax year but received in another. Paragraph 42 of TR 98/1 states that salary and wages or other similar remuneration is assessable on a receipts basis. This is irrespective of whether that income relates to a past or future income period. Similarly, a lump sum amount of assessable income in arrears is included in a taxpayer’s assessable income in the year in which it is received. In your case, you received payments in the 2016-17 income year relating to this and previous income years. Under section 6-5 of the ITAA 1997 the payments are included in your assessable income for the 2016-17 income year, as the income was received in that year. Lump sum payments in arrears are declared at question 24 ‘other income’ on the supplementary section of your tax return.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions. | Relevant facts: In the 2016-17 income year you received income protection payments due to a workplace injury. | The payments included back payments from previous income years. | Your PAYG payment summary shows gross payments and no tax withheld.