Edited version of private ruling

Authorisation Number: 1011690978496

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Ruling

Subject: Assessability of lump sum payment

Question and answer:

Is the lump sum payment you received for back pay salary assessable in the year you received it?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts:

You are from overseas.

You worked in Australia for a period of time.

You resided here for the period you were employed.

You received a lump sum payment from your employer as back pay for wages.

Relevant legislative provisions

Income tax Assessment Act 1997 Section 6-5

Reasons for decision

Subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that in working out whether a taxpayer has derived an amount of ordinary income and when it is derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayers behalf or as the taxpayer directs.

In determining the basis of derivation of income, paragraph 42 of Taxation Ruling 98/1 states that:

Employment income

Income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period.

In your case, you received a lump sum payment for unpaid wages relating to work you performed in past financial years. In accordance with paragraph 42 of TR 98/1 your lump sum payment is considered to have been derived and will be assessable on a receipts basis.

Therefore, the amount of the payment will need to be included in your Australian tax return in the year in which it is received.

Additional Note

Please note that you may be entitled to a lump sum in arrears offset. Whether an offset applies in your situation cannot be determined until you lodge your return.

To be eligible for the lump sum in arrears tax offset a taxpayer must satisfy the following conditions:

· 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

· 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) of the ITAA 1936 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.

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