ATO Interpretative Decision

ATO ID 2001/312 (Withdrawn)

Income Tax

• This ATO ID is a simple restatement of the law and does not contain an interpretative decision.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer, who received a lump sum payment for loss of wages under an insurance policy not owned by the taxpayer, eligible for a Lump Sum in Arrears Rebate (LSIAR) pursuant to section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes, the taxpayer is eligible for a LSIAR pursuant to section 159ZRA of the ITAA 1936 where the payment covers more than one year of income and is not less than 10 per cent of the taxpayer's normal taxable income.

Facts

The taxpayer suffered an accident and was rendered incapable of continuing employment. In a later income year the taxpayer received a lump sum compensation payment, representing lost wages calculated at a weekly rate. Part of that payment covered a period commencing in an earlier income year.

The lump sum payment was not made under an insurance policy owned by the taxpayer.

The amount of the lump sum which accrued before the year of receipt is not less than 10% of the taxpayer's normal taxable income.

Reasons for Decision

The lump sum compensation amount received by the taxpayer is a payment for loss of income and so 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 certain assessable lump sum payments containing an amount that accrued in earlier income years may be entitled to a LSIAR under section 159ZRA of the ITAA 1936. The rebate 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 LSIAR a taxpayer must satisty the following conditions:

(1)

the taxpayer must have received a lump sum payment of eligible income that 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 include income by way of compensation or sickness or accident pay that is:

•

in respect of an incapacity for work;

•

calculated at a weekly or other periodical rate; and

•

not made under a policy of insurance to the owner of the policy; and

(2)

the amount of the lump sum which accrued before the year of receipt must not be less than 10% of the taxpayer's normal taxable income of the year of receipt. Normal taxable income is defined in subsection 159ZR(1) to be taxable income less:

•

the amount of the eligible lump sum that accrued in earlier years;

•

abnormal income (generally income of certain professionals, such as artists or sportspeople, that is subject to averaging);

•

net capital gains;

•

eligible termination payments; and

•

lump sum payments on termination of employment in lieu of annual leave or long service leave.

The taxpayer's compensation payment qualifies as eligible income. Furthermore, the amount of the lump sum payment received by the taxpayer is not less than 10% of the taxpayer's normal taxable income. The taxpayer is therefore entitled to a LSIAR.

The amount of the LSIAR to which the taxpayer is entitled is calculated in accordance with sections 159ZRB to 159ZRD of the ITAA 1936. The rebate amount is effectively the difference between the tax payable on the lump sum in the year of receipt, and the tax that would have been paid had it been taxed as it accrued.

Legislative References:
Income Tax Assessment Act 1936
   subsection 159ZR(1)
   section 159ZRA
   section 159ZRB
   section 159ZRC
   section 159ZRD

Keywords
Compensation payments
Arrears payments

Business Line:  Small Business/Individual Taxpayers

Date of publication:  8 September 2001

ISSN: 1445-2782