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Edited version of your written advice
Authorisation Number: 1051276710081
Date of advice: 7 September 2017
Ruling
Subject: Lump sum payment in arrears
Question 1
Is the lump sum payment for underpaid wages, received in late 201Y, for the 201X to 201Y years assessable in the 201Y year?
Answer
No
Question 2
Is the lump sum payment for underpaid wages, received in late 201Y, for the 201X to 201Y years assessable in the 201Z year?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 201Z
The scheme commenced on:
1 July 201Y
Relevant facts:
You were employed as a hospitality manager respectively.
You claimed that during your period of employment you were paid wages that were below the Industry Award Scale for employees with the same job scope.
You and your previous employer have reached an agreement and you have executed a Deed of Settlement prepared by your previous employer’s solicitors in 201Y.
Payment was due in late 201Y.
The solicitor for the taxpayers and the solicitors for the employer disagree as to the net payment and the amount of tax to be withheld.
The employer has agreed to pay the taxpayers the back pay of wage and entitlements for the period of financial year 201X, 201A and 201B as a lump sum payment.
Relevant Legislation:
Income Tax Assessment Act 1997 Subsection 6-5(2)
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Salary and wages income is regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997.
Taxation Ruling TR 98/1 sets out the Commissioner's policy on the derivation of income. Paragraph 42 of 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 may relate to a past or future income period. Therefore payments paid to an individual are considered to be derived when the payment is received.
In your case, as you received the lump sum income in the 201Z income year, this amount is assessable in that year.
Please note, you may be entitled to a lump sum in arrears tax offset. Individuals who receive assessable lump sum payments containing an amount that accrued in earlier income years may be entitled to a tax offset under section 159ZRA of the Income Tax Assessment Act 1936. The tax 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 the year in which it accrued.
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