Private ruling: Lump sum payment in arrears – eligible income
Date of advice: 19 April 2018
Published: July 2018
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the lump sum payment you received under an income protection insurance policy considered eligible income pursuant to section 159ZR of the Income Tax Assessment Act 1936 ? | A1: Yes.

Relevant facts and circumstances: You resigned from your employment due to sickness. You were a member of a superannuation fund and you had default income protection cover as part of those entitlements subject to certain conditions being met. The income protection cover was provided by an insurance company (the insurer). The insurer offers life insurance policies as a group insurance policy. The policy owner is the trustee of a complying superannuation fund. The policy owner in your case is the trustee of your superannuation fund. Your insurance cover provided a person insured with a replacement income benefit if they are totally disabled or partially disabled and unable to work due to sickness or injury. You submitted a claim through your superannuation fund which was subsequently assessed and approved by the insurer as a sickness claim due to total disability. You received a gross benefit payment from the insurer for a specified period of time. You believe you may be entitled to the lump sum payment in arrears tax offset.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1936 subsection 159ZR(1) | Income Tax Assessment Act 1936 paragraph 159ZR(1)(c) | Income Tax Assessment Act 1936 paragraph 159ZRA(1)(a) | Taxation Administration Act 1953 section 12-120 to Schedule 1

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 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 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. Federal Commissioner of Taxation 79 ATC 4641; (1979) 10 ATR 411). Paragraph 159ZRA(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) allows a lump sum payment in arrears tax offset where the taxpayers assessable income in a year of income includes one or more eligible lump sums and the total arrears amount is not less than 10% of the amount (if any) remaining after deducting that total arrears amount from the normal taxable income of the current year. Subsection 159ZR(1) of the ITAA 1936 defines an eligible lump sum as a lump sum payment of eligible income received on or after 1 July 1986 that is included in the assessable income of the year of income and accrued, in whole or in part, in an earlier year or years of income. Eligible income is defined in subsection 159ZR(1) of the ITAA 1936 to mean certain specified types of income. Paragraph 159ZR(1)(c) of the ITAA 1936 includes in this definition payments covered by section 12-80 or section 12-120 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). Section 12-120 in Schedule 1 to the TAA 1953 refers to a compensation, sickness or accident payment that is: ● made in respect of an incapacity for work; and ● is calculated at a periodical rate; and ● is not a payment made under an insurance policy to the policy owner. In your case you are not the policy owner. You received a lump sum payment under a group insurance policy where your superannuation fund was the policy owner. It was calculated monthly in respect of you being unable to work for a period of time due to sickness. Therefore, the payment you received that accrued in earlier years of income is considered ‘eligible income’ under section 159ZR of the ITAA 1936.