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Edited version of your written advice
Authorisation Number: 5010047624628
Date of advice: 19 February 2018
Ruling
Subject: Treatment of a Lump sum E Payment as fully assessable
Question
Is the lump sum compensation amount of $X for the replacement of salary and wages recorded on the 2017 payment summary considered as assessable ordinary income?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2017
The scheme commences on:
01/07/2012
Relevant facts and circumstances
You joined the organisation over X years ago.
You became ill X months after commencing and soon after your employment was terminated.
A significant amount of your salary was salary sacrificed and paid in the form of Fringe Benefits instead of normal assessable income.
You were paid a lump sum E, compensation for the replacement of salary and wages subsequent to your termination, which was treated as fully assessable.
Your lump sum payment E was assessable in the 2017 income tax year as it was received as part of payment summary for the 2017 year.
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 an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) (Dixon's case). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).
Salary and wages and sickness benefits are regarded as assessable income under subsection 6-5(2) of the ITAA 1997.
A salary sacrifice arrangement is an arrangement between an employer and an employee whereby the employee agrees to forgo part of their future salary entitlement in return for a benefit of a similar value.
The consequence of such an arrangement is that the employee is assessed on the reduced amount of the salary actually received and the employer is liable for any fringe benefits tax payable on the benefit provided.
The Commissioner’s view on the taxation implications of salary sacrifice arrangements is discussed in Taxation Ruling TR 2001/10.
TR 2001/10 states that an effective salary sacrifice arrangement is an arrangement between the employer and the employee detailing the amount of income to be sacrificed, and must be entered into before the employee becomes entitled to be paid.
Where a person resigns or retires from their employment and is no longer working, there is generally no employer. Furthermore where a person is no longer employed they are not considered to be an employee and therefore not earning a salary. Any previous employer/employee relationship and/or entitlements generally cease upon resignation or retirement.
Where a person has retired and is receiving sickness insurance payments from an insurer, there is no employer/employee relationship. The amounts are paid due to an obligation under an insurance policy rather than as remuneration from an employer for services provided by an employee. As there is no employer/employee relationship, a salary sacrifice arrangement cannot be entered into. That is, the sickness payments cannot be salary sacrificed.
We acknowledge that your sickness benefits are replacing your previous employment income and form part of your assessable income. However, the legislation does not allow for sickness benefits to be salary sacrificed.
ATO view documents
TR 2001/10
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