Private ruling: Lump sum compensation payment
Published: October 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the lump sum payment you received assessable in the 2012-13 financial year? | A1: No. | Q2: Is the lump sum payment assessable under the capital gains tax provisions? | A2: No. | Q3: Can you salary sacrifice an amount of the lump sum payment? | A3: No.

Relevant facts and circumstances: You suffered a workplace injury in the relevant year. You made a claim for workers' compensation under the Seafarers Rehabilitation and Compensation Act 1992 (SRC Act) in relation to the condition. A determination was made, which disallowed your claim for compensation. You made a request to reconsider the determination and late in the relevant year a reviewable decision was made affirming the determination. You lodged an application for review of the reviewable decision with the Administrative Appeals Tribunal of Australia (AAT). The AAT found that you had suffered an injury which resulted in your incapacity for work and that compensation was payable. You were paid a lump sum payment in the second half of the subsequent year. You have a salary sacrifice arrangement in place with your employer to salary sacrifice a specified amount into your superannuation fund. The agreement does not cover compensation income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 6-5(4)

Reasons for decision: Summary: Sections 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of an Australian resident includes ordinary and statutory income derived directly and indirectly from all sources during the income year. Workers compensation policies provide for periodic payments in the event of loss of income caused by a work-related injury or illness. These payments are assessable as income under section 6-5 ITAA 1997, as they are paid to take the place of lost earnings. An amount received as a lump sum representing arrears of weekly compensation payments is classified as ordinary income and is fully assessable in the year received. This is the case even though the payment relates to earlier income years. As the amount is assessable under section 6-5 of the ITAA 1997 as ordinary income the capital gains tax provisions do not apply to your lump sum payment. | Detailed Reasoning - Derivation of income: As noted under section 6-5 of the ITAA 1997, ordinary income is assessable in the income year in which it is derived. Taxation Ruling TR 98/1 deals with the derivation of ordinary income and states that the general rule with non-trading income is that it is derived when it is received. Subsection 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it was derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs. In your case, the payment is for loss of earnings and subsequently will need to be included as part of your assessable income in the financial year in which it is received. We acknowledge the circumstances and associated tax liabilities. However, the Commissioner has no discretion to assess the payment in any other income year. | Detailed Reasoning - Salary sacrifice arrangement: A salary sacrifice arrangement is an arrangement between an employer and an employee whereby the employee agrees to forgo part of their future remuneration entitlement in return for a benefit of a similar value. The consequence of such an arrangement is that the employee is assessed on the reduced amount of the salary actually received and the employer is liable for any fringe benefits tax payable on the benefit provided. Salary sacrifice arrangements require a contractual relationship between an employer and employee. The contract between the two parties, employer and employee, is required prior to services being performed. In your case, you have a salary sacrifice arrangement in place with your employer to salary sacrifice a specified amount into your superannuation fund. The agreement does not cover compensation income. Therefore, you are not entitled to salary sacrifice any of your lump sum compensation payment.