Private ruling: Lump Sum Payment in Arrears Tax Offset
Published: November 2013
Ruling period: § Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the payment received in the 2013 financial year that relate to prior income years assessable in the year of receipt? | A1: Yes. | Q2: Does the Commissioner have the discretion to spread the income received in the 2013 financial year over the financial years the payment relates? | A2: No. | Q3: Are you entitled to a Lump Sum in Arrears (LSIA) Tax Offset for the lump sum payment ending more than 12 months before the date on which it was paid in the 2013 financial year? | A3: Yes.

Relevant facts and circumstances: You became ill and were unable to perform your employment duties for a prolonged period of time. You were unaware that you had a current income protection policy within your Superannuation Fund until after your rehabilitation and return to work. The insurance policy was owned by your Superannuation Fund. You made a successful retrospective claim against the insurance policy and received a lump sum payment of salary and wages during the 2012-13 financial year, which was accrued over the 2009-10, 2010-11 and 2011-12 financial years. The total of the payment was greater than 10% of the taxable income for the current year, less the total of the arrears amount received.

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 159ZR(1) | Taxation Administration Act 1953 Section 12-120 in Schedule 1

Reasons for decision: Detailed Reasoning - Assessability of income: Income amounts are generally included in the calculation of a taxpayer's taxable income in the year in which they are received. Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) requires an amount of ordinary income to be brought to account as assessable income when it has been derived. 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 employment remuneration is assessable on a receipts basis. This is irrespective of whether that income relates to a past or future income period. Therefore, the lump sum payments of assessable income should be included as taxable income in the year in which it is received. Unfortunately there is no provision in the ITAA 1997 or Income Tax Assessment Act 1936 (ITAA 1936) that allows the Commissioner discression to average lump sum payments that relate to income from other financial years. | Detailed Reasoning - LSIA Tax Offset: To alleviate the problem of more tax being payable in the year in which the lump sum is received (than would have been payable if the lump sum had been taxed in each of the years in which it accrued), section 159ZRA of the ITAA 1936 allows individual taxpayers who receive certain eligible assessable LSIA payments a LSIA Tax Offset. To be eligible for the LSIA Tax Offset a taxpayer must satisfy the following conditions: 1. the taxpayer must have received one or more lump sum payments of eligible income that accrued, in whole or in part, in an earlier year or years of income, and 2. the total arrears amount of the lump sum is not less than 10% of the taxable income for the current year less the total of the arrears amount received. Subsection 159ZR(1) of the ITAA 1936 lists the type of payments that are eligible for the LSIA Tax Offset, and includes a payment covered by section 12-120 in Schedule 1 to the Taxation Administration Act 1953 . This section states that an eligible payment is: (a) made for an individual's incapacity for work; and (b) calculated at a periodical rate; and (c) not a payment made under an insurance policy to the policy owner. Further, subsection 159ZR(1) of the ITAA 1936 states that eligible payments include salary or wages to the extent to which they accrued during a period ending more than 12 months before the date on which they are paid. In your case, you received lump sum payments relating to a successful income insurance policy claim owned by your Superannuation Fund. The payment was for salary or wages accrued during periods ending more than 12 months before the date on which it was paid. The payment received was greater than 10% of the taxable income for the current year less the total of the arrears amount received. Therefore you are entitled to a LSIA Tax Offset for the payment received. The rulings in the register have 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.