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Edited version of your written advice
Authorisation Number: 1012779943156
Ruling
Subject: Income - lump sum payment
Question 1:
Is the lump sum payment you received assessable in the year in which it was received?
Answer:
Yes.
Question 2:
Are you entitled to a lump sum in arrears offset?
Answer:
Yes, providing your lump sum payment in arrears is more than 10% of your normal taxable income.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commenced on:
1 July 2014
Relevant facts
You sustained injuries in the course of your employment.
You resigned from your employment.
As a result of your injuries you were entitled to receive fortnightly payments under a legislative provision.
You received fortnightly payments over a number of financial years.
You took legal action claiming that you had been underpaid.
It was held that your fortnightly payments should have been paid at a higher rate. You were awarded a lump sum amount representing a back payment of the fortnightly amounts you had been underpaid.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Subsection 6-5(1).
Income Tax Assessment Act 1936 Section 159ZRA.
Income Tax Assessment Act 1936 Subsection 159ZR(1).
Reasons for decision
Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during that income year.
Weekly or other periodical income protection payments received as compensation for loss of wages are fully assessable as ordinary income. The essential character of these payments is that of an income substitute, therefore these amounts are assessable income.
The fortnightly payments you received were paid to you as income support and were fully assessable when you received them under subsection 6-5(1) if the ITAA 1997. Similarly back payments paid as a lump sum in the 2014-15 financial year also have the character of the ordinary income and are assessable under section 6-5 of the ITAA 1997.
Timing
In determining the basis of derivation of income, paragraph 42 of Taxation Ruling TR 98/1 states that:
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 the lump sum payment in the 2014-15 financial year being back payments for previous financial years. Regardless of what period the payment is for, under the receipts basis, this payment is included in your assessable income for the 2014-15 financial year.
Lump sum in arrears and income protection payments
Section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936) allows a lump sum payment in arrears tax offset where the taxpayer's assessable income in a year of income includes one or more eligible lump sums.
An eligible lump sum is defined as a lump sum payment of eligible income received on or after 1 July 1986 that is included in the assessable income of the taxpayer and accrued, in whole or in part, in an earlier year or years of income (subsection 159ZR(1) of the ITAA 1936).
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). Section 12-120 in Schedule 1 to the TAA refers to a payment that is:
• in respect of an incapacity for work;
• calculated at a weekly or other periodical rate; and
• is not a payment made under an insurance policy to the policy owner.
In your case, the back payment was for periodic incapacity payments that were not made under a policy of insurance held by yourself. Therefore, this back payment is included in the definition of eligible income and consequently is an eligible lump sum.
However to be eligible for the tax offset, the amount of the eligible lump sum that accrued before the year of receipt must not be less than 10% of the 'normal taxable income' of the year of receipt. Your normal taxable income is your taxable income less certain amounts, as defined in subsection 159ZR(1) of the ITAA 1936.
If your lump sum in arrears payment that you receive is more than 10% of your 'normal taxable income' for the 2014-15 financial year, you will be entitled to a lump sum in arrears tax offset under section 159ZRA of the ITAA 1936 in the 2014-15 financial year.
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