Private ruling: Compensation payment
Published: June 2018
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Questions and answers | 1. Is the amount of $X subject to the lump sum in arrears offset? | Yes. | 2. Does the amount of $X relate to the income year ended 30 June 2016? | Yes.

Relevant facts and circumstances: You received a workplace injury. The workers compensation company refused to pay you compensation for inability to work. Following extensive litigation, a court order was made that compensation was payable for the injury and inability to work. Your insurer paid your compensation in the 2016/17 income year. You continued to receive compensation payments through the 2016/17 income year. In preparing your 2016/17 PAYG Payment Summary, your insurer incorrectly followed the guidelines of ATO Rates and Schedules, Schedule 5, “Tax table for back payments of salary, wages, commissions, bonuses and similar payments”, whereby all back payments for the 12 months prior to 21 July 2016 are included in the Gross Payments for the 2016/17 income year, and only the payments for periods prior 12 months are included at Lump Sum E. The compensation you received is not a back payment of salary, wages, commissions, bonuses and similar payments. The 2016/17 PAYG Payment Summary issued to you by your insurer shows the following amounts: ● Gross Payments: $X ● Lump sum payments E: $X ● Lump Sum E Financial Year breakdown: ● 30 June 2016: $X ● 30 June 2015: $X Your 2016/17 PAYG Payment Summary should reflect the back payments applicable to the relevant years, being: ● Gross Payments: $X ● Lump sum payments E: $X ● Lump Sum E Financial Year breakdown: ● 30 June 2016: $X ● 30 June 2015: $X

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 159ZRA

Reasons for decision: Summary: Lump sum payment in arrears tax offset Individuals, who receive certain assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). A lump sum payment in arrears is a payment received in one tax year that includes income that accrued in previous tax years. The lump sum is assessable in the year of receipt, but taxpayers may be eligible for a tax offset to reduce the amount of tax they have to pay. Lump sum payments in arrears would include back payments of pension that accrued in a period more than 12 months before the date of payment. A lump sum payment in arrears tax offset is not available where the lump sum payment in arrears is less than 10% of the taxpayer’s normal taxable income less the lump sum payment in arrears. 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 each of the years in which it accrued. A taxpayer would include their assessable lump sum payments in arrears at the income tax return label–other income. We calculate the tax offset amount based on the information provided at the label and also the information the taxpayer provides us in a separate ‘Schedule of Additional Information’. The taxpayer would include in the schedule their details (name, address, tax file number etc.) and the amount of payment in arrears for each income year. In your case, you suffered a work place injury which left you unable to work. Your insurer refused to make payments. You took legal action to obtain compensation you for the non-receipt of those payments. As a result you received compensation which included a lump sum amount of $X relating to earlier income years. You received this amount in the income year ended 30 June 2017. Your insurer included the amount on the PAYG payment summary they issued to you for that income year but, due to an error on their part, the breakdown of the amount was shown incorrectly. This correct breakdown is: For the income year ended 30 June 2016: $X For the income year ended 30 June 2015: $X As the lump sum payment in arrears of $X is not less than 10% of the your normal taxable income less the lump sum payment in arrears, you are entitled to receive the lump sum payment in arrears tax offset under section 159ZRA of the ITAA 1936.