Private ruling: Lump sum in arrears tax offset
Date of advice: 30 March 2016
Published: May 2016
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a Lump Sum in Arrears (LSIA) tax offset for the lump sum payment which was paid in the year ended 30 June 20YY? | A1: Yes.

Relevant facts and circumstances: During the 20XX/YY income year, you lodged an underpayment of wages claim with the industrial relations court for non-payment of underpaid wages for a number of years. Your employer admitted partial liability but the full sum of the claim was in dispute. Both parties agreed to an out of court settlement. Your employer included this payment as salary and wages on your payment summary. The total of the payment was greater than 10% of the taxable income for the year, less the total of the arrears amount received.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 159ZRA, | Income Tax Assessment Act 1936 Subsection 159ZR(1) and | Income Tax Assessment Act 1997 Section 6-5 .

Reasons for decision: Summary: A lump sum amount received by a taxpayer with regards to income payments in arrears is fully assessable when received, under section 6-5 of the Income Tax Assessment Act 1997 . This is the case even though part of the payment relates to an earlier income year. However, individual taxpayers who receive lump sum payments containing an amount that accrued in earlier income years may be entitled to a lump sum offset. The 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. 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 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 a lump sum settlement payment from your employer relating to a back payment for underpaid wages. Whilst your employer has not included the amount in the Lump Sum E field on your payment summary, we consider that the payment was for salary or wages. As the payment received was accrued during periods ending more than 12 months before the date on which it was paid, and greater than 10% of the taxable income for the year less the total of the arrears amount received, we consider you to be entitled to a LSIA Tax Offset for the payment received.