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Edited version of your written advice
Authorisation Number: 1013125809442
Date of advice: 22 November 2016
Ruling
Subject: Lump sum payment in arrears
Question
You suffered a workplace injury. You were receiving income replacement payments from Workers' Compensation
After your claim was settled, your employer paid a lump sum in the 201X-1X financial year, consisting of salary in arrears from the 201X-1X and 201X-1X financial years.
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 201X
The scheme commences on:
1 July 201X
Relevant facts and circumstances
You suffered a workplace injury. You were receiving income replacement payments from Workers' Compensation.
After your claim was settled, your employer paid a lump sum in the 201X-1X financial year, consisting of salary in arrears from the 201X-1X and 201X-1X financial years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Subsection 6-5(2) 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, whether in or out of Australia, during the income year.
Taxation Ruling TR 98/1 considers the appropriate method of determining when income is derived under subsection 6-5(2) of the ITAA 1997 where income is earned in one tax year but received in another. Paragraph 42 of TR 98/1 states that salary and wages or other employment remuneration is assessable on a receipts basis. This is irrespective of whether that income relates to a past or future income period.
Lump sum payments in arrears are payments that relate to an earlier income year or years. Therefore, a lump sum amount of assessable income in arrears will be included in a taxpayer's taxable income in the year in which it is received even when it relates to an earlier year of income. As the lump sum payment in arrears from your previous employer was received during the 201X-1X financial year, it is assessable in this income year, even though it relates to prior income years.
Individual taxpayers who receive certain income in a lump sum payment containing an amount that accrued in earlier income years may be entitled to a rebate of tax (ITAA36 s159ZR to s 159ZRD).
The rebate is designed to alleviate the problem of more tax being payable in the year in which the lump sum is received than would have been payable if the lump sum had been taxed in each of the years in which it accrued. The rebate is basically calculated as the difference between the extra amount of tax payable in the year of receipt because of the lump sum and the amount of tax that would have been payable if the lump sum had been taxed as it accrued. Note that the sum of all rebates cannot exceed the amount of tax otherwise payable.
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