Private ruling: lump sum payment
Published: February 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the lump sum in arrears payment included in your assessable income in the 2010-11 financial year? | A1: Yes. | Q2: Is part of your payment an eligible lump sum when determining your entitlement to a lump sum payment in arrears tax offset? | A2: Yes.

Relevant facts and circumstances: In 2009 you were injured at work and subsequently received workcover payments. These weekly payments continued for a few months. The payments then stopped upon a dispute with your employer. You were successful in challenging the employer's decision. Later the employer terminated your employment and a lump sum was paid. The lump sum was an arrears of weekly payments for a period of more than 12 months. The lump sum payment was not made under an insurance policy owned by you. The employer put all your payments as gross payments and no lump sum E amount on your payment summary. Some of the payment related to the previous financial year.

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

Reasons for decision: Summary: 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 received compensation for income while you were injured. 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 taxpayers taxable income in the year in which it is received. In your case, you received a lump sum payment in the 2010-11 financial year, some of which related to the previous financial year. Under section 6-5 of the ITAA 1997 the lump sum amount is included in your assessable income for the 2010-11 financial year, as the income was received in that year. | Detailed Reasoning - Lump sum payment in arrears tax offset: Individual taxpayers who receive assessable lump sum payments containing an amount that accrued in earlier income years may be entitled to a 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 the year in which it accrued. A person is entitled to a lump sum payment in arrears tax offset where: § the assessable income of the taxpayer of a year of income includes an eligible lump sum, and § the total arrears amount is not less than 10% of the amount (if any) remaining after deducting the total arrears amount from the normal taxable income of the current year. Income by way of compensation in respect of an incapacity for work, being payments calculated at a periodical rate and not including payments made under an insurance policy to the owner of the policy is included as eligible income (Paragraph 159ZR(1)(c) of the ITAA 1936 and section 12-120 in Schedule 1 to the Taxation Administration Act 1953 ). You have therefore received 'eligible income' for the purpose of determining your entitlement to a lump sum payment in arrears tax offset. The amount of the tax offset to which you are entitled is calculated in accordance with sections 159ZRB to 159ZRD of the ITAA 1936.

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