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Ruling
Subject: Lump sum arrears payment
Question
Is the lump sum payment you received in the 2010-11 financial year, assessable in the 2010-11 financial year?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commences on
1 July 2010
Relevant facts and circumstances
You were paid a lump sum income protection payment under a group salary continuance policy in the financial year, which accrued in the prior financial year.
You have provided a PAYG payment summary for the financial year, which shows a lump sum arrears payment.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 6-5(4)
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.
Income protection policies provide for periodic payments in the event of loss of income caused by the insured becoming disabled through sickness or injury. These payments are assessable as income under section 6-5 ITAA 1997, as they are paid to take the place of lost earnings.
An amount received as a lump sum representing arrears of monthly compensation payments is classified as ordinary income and is assessable in the year received. This is the case even though the payment relates to earlier income years.
Derivation of income
As noted under section 6-5 of the ITAA 1997, ordinary income is assessable in the income year in which it is derived.
Taxation Ruling TR 98/1 deals with the derivation of ordinary income and states that the general rule with non-trading income is that it is derived when it is received.
Subsection 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it was derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.
In your case, the payment is for loss of earnings and subsequently included as part of your assessable income when it was received. We acknowledge the circumstances and associated tax liabilities. However, the Commissioner has no discretion to assess the payment in any other income year or to reduce your taxable income in future income years.