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Ruling

Subject: Lump sum in arrears tax offset

Question

Can the senior Australians, low income and spouse tax offsets be taken into account when calculating the lump sum in arrears tax offset?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You received a lump sum payment in arrears.

If you received the payment in the years to which it applied, you would not have paid any tax due to the operation of the senior Australians, low income and spouse tax offsets.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 159ZR

Income Tax Assessment Act 1936 Section 159ZRA

Income Tax Assessment Act 1936 Section 159ZRB

Income Tax Assessment Act 1936 Section 159ZRC

Income Tax Assessment Act 1936 Section 159ZRD

Reasons for decision

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 lump sum payment in arrears tax offset.

The tax offset is calculated under sections 159ZR to 159ZRD of the Income Tax Assessment Act 1936 (ITAA 1936).

To be eligible for the lump sum payment in arrears tax offset, the conditions specified in section 159ZRA of the ITAA1936 must be met. Broadly, the tax offset may be available where a taxpayer receives an amount of specified income in a lump sum payment that contains an amount in arrears, and the arrears amount has been accrued for more than 12 months before the payment date and is not less than 10% of the taxpayer's normal taxable income of the year, in which payment is received.

Where the eligibility test is satisfied, the tax offset is calculated according to the formula as set out in section 159ZRB of the ITAA 1936:

Tax on arrears   less   Notional tax on arrears

Tax on arrears is the amount by which the rebated tax on the taxable income of the current year exceeds the rebated tax on the taxable income of the current year, being that taxable income reduced by the total arrears amount;

Notional tax on arrears is the amount representing the rebated tax that would have been payable on the amount of the lump sum if that amount had been taxed in the years in which it accrued.

Subsection 159ZR(1) of the ITAA 1936 states:

"rebated tax" means the tax payable after the allowance of any tax offset under Division 82, 83, 301 or 302 of the Income Tax Assessment Act 1997, subsection 392-35(2) of that Act (which allows some primary producers tax offsets) or Division 82 of the Income Tax (Transitional Provisions) Act 1997, but before the allowance of any other tax offsets or any credits. (emphasis added)

Divisions 82 and 83 of the ITAA 1997 and Division 82 of the Income Tax (Transitional Provisions) Act 1997 provide tax offsets with respect to certain employment termination payments. Divisions 301 and 302 of the ITAA 1997 provide tax offsets with respect to certain superannuation payments.

The definition of "rebated tax" means that for the purposes of the calculation of the lump sum in arrears tax offset, the only tax offsets taken into account are the tax offsets set out in the definition.

The definition does not include the senior Australians, low income or spouse tax offsets. Therefore these are not tax offsets which can be taken into account when calculating rebated tax, and therefore can not be taken into account when calculating the lump sum in arrears tax offset.