Edited version of private advice

Authorisation Number: 1051655268893

Date of advice: 02 April 2020

Ruling

Subject: A lump sum payment

Question

Is the lump sum payment received correctly assessed in the 20XX-XX financial year?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You received a lump sum payment/reimbursement as a result of court action taken.

The lump sum payment received was calculated based on weekly payments payable for the period late 20XX to early 20XX totalling $XXX.

The amount awarded included $XX which was repaid to another government department for payments you received for the period early 20XX to early 20XX.

$XX of the amount was accrued in the 20XX-XX9 financial year, the year the payment was received.

You received a payment summary for the 20XX-XX financial year showing $XXX as a lump sum E payment.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 159ZRA

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 during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

• are earned
• are expected
• are relied upon; and
• have an element of periodicity, recurrence or regularity.

Payments of salary and wages, including pensions, are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. Federal Commissioner of Taxation (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

You received a lump sum payment of $XXX during the 20XX-XX financial year. The lump sum amount was a back payment of weekly payments payable for the period late 20XX to early 20XX. This payment is considered to be ordinary income and is assessable under subsection 6-5(2) of the ITAA 1997.

Though section 6-5 of the ITAA 1997 requires an amount of ordinary income to be brought to account as assessable income when it has been derived, it provides no definition of derived. Taxation Ruling TR98/1 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 receipts basis. This is irrespective of whether that income relates to either past or future income period. Therefore, a lump sum amount of assessable income in arrears will be included in your assessable income in the year in which it is received.

In your case, you received the lump sum payment in the 20XX-XX financial year; therefore, the whole amount has been correctly included in your 20XX-XX tax return.

Lump sum in arrears tax offset

Individual taxpayers, who receive certain assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 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 each of the years in which it accrued.

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.

As your lump sum in arrears payment that you received is more than 10% of your 'normal taxable income' for the 20XX-XX income year, you have received a lump sum in arrears tax offset of $XXX.

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