Edited version of private advice

Authorisation Number: 1052384174636

Date of advice: 02 May 2025

Ruling

Subject: Assessable income

Question 1

Is the lump sum payment you received assessable under section 6-5 of the Income Tax Assessment Act 1997 in the year in which it was received?

Answer 1

Yes.

Question 2

Are you entitled to a lump sum payment in arrears tax offset in relation to the lump sum payment you received in the 20XX income year?

Answer 2

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

On XX December 20XX you were engaged by Employer A.

You have been deployed to various regional offshore locations operated by Employer A, including Location A and, on six or seven occasions, Location B.

During your deployments to Location B in October 20XX and November 20XX, you experienced some extremely trying interactions with your clients and ongoing tensions between your colleagues.

You also encountered ongoing interactions with your Team Leader which you believed constituted bullying and harassment.

As a result, you experienced depression and anxiety and sought assistance through a number of avenues including consultations with;

•                your general practitioner,

•                a counsellor through the EAP program

•                a Clinical Psychologist in June and July in 20XX.

You lodged a claim against Employer A.

You were unable to work for a number of years during the ruling period due to your condition and the uncertainty of your claim.

The Administrative Appeals Tribunal decided that you suffered incapacity and impairment as a result of an injury, to which employment with Employer A contributed to a significant degree, which was the subject of a claim for compensation dated XX September 20XX and which gives rise to entitlement to compensation pursuant to section 14 of the Safety Rehabilitation and Compensation Act 1988 (SRCA 1988).

As a result of the injury, you suffer from impairment that is likely to continue indefinitely, and which is assessed to be at least 10% according to Table 5.1 of the approved Comcare Guide (Edition 2.1), and entitles you to:

(i)             Lump sum compensation pursuant to section 24 of the SRCA 1998; and

(ii)            Further lump sum compensation pursuant to section 27 of the SRCA 1988 in respect of non-economic loss, assessed in accordance with your answers to the relevant assessment form submitted with the claim.

On the XX May 20XX you received a letter from Comcare detailing your normal weekly earning (NWE) which is the figure they used to work out your incapacity payments under section 8 of the Act.

On XX October 20XX you received advice (Advice) regarding your claim, listing an injury date of XX November 20XX. The letter was written in relation to your claim for time off work, which was determined under the SRCA 1988.

The Advice listed incapacity payments from XX December 20XX to XX December 20XX.

You received a lump sum payment of $X! which was included in your payment summary from Employer A for the 20XX income year.

The total tax withheld was $X!

The lump sum payment you received is more than 10% of the normal taxable income of the current year.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 159ZRA

Income Tax Assessment Act 1997 section 6-5

Schedule 1 to the Taxation Administration Act 1953 section 12-120

Reasons for decision

Question 1

Lump sum payments

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.

An amount paid to compensate for loss generally acquires the same nature of what it is substituting (FC of T 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 (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

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 received as a product of any employment, services rendered, or any business;

•                are earned;

•                are received regularly or periodically;

•                are expected; and

•                are relied upon.

It is not necessary for all of these characteristics to be present for an amount to be considered ordinary income. A lump sum payment is generally classified as ordinary income if it is simply a lump sum made up of periodic income payments but paid in arrears to cover a certain period.

Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.

In your case the payment made to you, even though being a lump sum payment, was compensation intended to replace the wages you would have normally earned. As the lump sum is compensation for loss of income, it is assessable as ordinary income.

Receipt of income

Subsection 6-5(4) of the ITAA 1997 provides that an entity derives an amount of ordinary income as soon as it is applied or dealt with in any way on the entity's behalf or as directed by it.

Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) sets out the Commissioner's view on when income is derived and explains that income can be derived either on the basis of the 'receipts' method or the 'earnings' method.

Under the earnings (or accruals) method, income is derived when it is earned and the point of derivation occurs when a recoverable debt is created. In most cases, the earnings method is the appropriate way to determine business income derived from a trading or manufacturing business.

Under the receipts method, income is derived when it is received, either actually or constructively, and is taken to be derived by a person although it may not actually be paid over, but is dealt with on his/her behalf or as he/she directs.

Paragraph 18 of TR 98/1 states that the receipts method is likely to be appropriate to determine:

•                income derived by an employee;

•                non-business income derived from the provision of knowledge or the exercise of skill possessed by the taxpayer; and

•                business income where the income is derived from the provision of knowledge or the exercise of skill possessed by the taxpayer in the provision of services (subject to certain qualifications).

Consequently, income from employment is normally 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

Although the lump sum payment you received relates to prior income years, as you received it in the 20XX income year, it will need to be included in your 20XX tax return.

Question 2

Lump sum payment in arrears tax offset

Individual taxpayers 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 (ITAA 1936).

The lump sum payment in arrears (LSPIA) 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.

A person is entitled to a lump sum payment in arrears tax offset where:

•                the assessable income of the taxpayer of a year of income includes an eligible lump sum, and;

•                the total arrears amount is not less than 10% of the amount (if any) remaining after deducting the total arrears amount from the normal taxable income of the current year.

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 lists the type of payments that are eligible for the LSPIA Tax Offset, and includes a payment covered by section 12-120 in Schedule 1 to the Taxation Administration Act 1953. This section refers to a compensation, sickness or accident payment that is:

(a) made for an individual's incapacity for work; and

(b) calculated at a periodical rate; and

(c) is not a payment made under an insurance policy to the policy owner.

You received a lump sum payment from Employer A, which had been calculated based on your normal weekly earnings, because you were unable to work for a period of time due to an injury. A portion of the payment accrued in earlier income years and is greater than 10% of your taxable income. Therefore, the payment you received meets the definition of an eligible lump sum, and you will be entitled to a LSPIA Tax Offset for the portion that accrued during the period earlier than 12 months before payment.

You will need to include any lump sum payment in arrears amount you receive in your tax return in the 20XX income year.

You will also need to provide a breakdown of the payment into each income year.

Report the payment in your tax return at Lump Sum E. We will then calculate your tax offset.

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