Private ruling: Lump sum payment
Published: January 2015
Ruling period: Income year ended 30 June 2012
Date scheme commenced: 1 July 200X

Ruling: Q1: Will the entire lump sum payment of your salary continuance benefit be assessable in the year of receipt? | A1: Yes

Relevant facts and circumstances: You were unable to work due to a serious medical condition and made a claim on your income protection insurance provided through your superannuation fund. After a lengthy dispute your monthly salary continuance payments were eventually made to you in a lump sum during the relevant financial year. These payments actually pertained to the 20xx/xx, 20xx/xx and 20xx/xx financial years. The monthly benefit was calculated based on your pre disability income.

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

Reasons for decision: Detailed Reasoning - Taxable income: Under section 4-10 of the Income Tax Assessment Act 1997 (ITAA 1997), income tax is worked out by reference to your taxable income for the income year. Taxable income for an income year is calculated by subtracting the deductions from the assessable income for that income year (section 4-15 of the ITAA 1997). Under section 6-5 of the ITAA 1997, assessable income includes income according to ordinary concepts (ordinary income) that is derived during the income year. Payments for rendering personal services (such as earnings and salary and wages) are ordinary income and are included in assessable income under section 6-5 of the ITAA 1997. An amount paid to compensate for loss generally acquires the character of that for which it is substituted. Periodic workers compensation payments have been held by the courts to be ordinary income because they are received as compensation for loss of income or salary ( FC of T v. Inkste r 89 ATC 5142; (1989) 20 ATR 1516). Periodic payments paid to a taxpayer during a period of disability under a personal accident, income protection or disability insurance policy are assessable on the same principle as workers compensation, that is, they are assessable where they are paid to replace lost earnings ( FC of T v. D.P. Smith 81 ATC 4114; (1981)11 ATR 538). In your case, the salary continuance benefits were calculated by reference to pre-disablement earnings. The salary continuance benefits were paid to replace the earnings that were lost as a result of your medical condition. These payments are assessable as ordinary income under section 6-5 of the ITAA 1997 as they were in substitution for the income you would have earned if it were not for your incapacity. You have asked if it is possible that your lump sum arrears of disability benefits be taxed over the period in which the benefits accrued, rather than being taxed when the arrears was received in the relevant year of income. Under section 6-5 of the ITAA 1997, ordinary income is included in the assessable income of a taxpayer in the income year in which it is derived. When is a lump sum arrears of disability benefits included in assessable income? Taxation Ruling IT 2107 deals with social security sickness benefits and workers' compensation benefits. It states that social security sickness benefits constitute assessable income of recipients in the year paid, and that so too are periodic receipts of workers' compensation, including lump sum arrears of compensation (paid in respect of the period between the date of the event giving rise to the compensation and the date of payment of those arrears). The issue of when a lump sum payment in arrears of periodic compensation is included in assessable income has been considered in a number of cases. In Case G8 75 ATC 27, 19 CTBR (NS) Case 102 , the taxpayer suffered an injury at work as a result of which she became entitled to compensation. During the 1971 income year she received payments under Employees' Compensation legislation, covering various periods from 12 December 1968. The taxpayer claimed that so much of the compensation paid to her as related to prior income years should be excluded from her assessable income for the 1971 income year. It was held that the payments were derived at the time they were received, and accordingly were assessable income in the 1971 income year. In Vargiemezis v. FC of T [2008] AATA 1152, the taxpayer had been incapacitated in the course of his employment and subsequently obtained a court order for a lump sum representing arrears of weekly compensation from his employer. The taxpayer requested a prior year amendment to apportion the lump sum over the year in which it accrued. It was held that the lump sum arrears was assessable in the income year it was received, notwithstanding that part of the amount was referable to a prior year. Your lump sum payment of arrears of salary continuance benefits was derived at the time it was received, that is, during the relevant year of income. Accordingly, it is assessable income in the relevant year of income (under section 6-5 of the ITAA 1997), and therefore forms part of your taxable income for that income year.