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Ruling

Subject: Timing of income

Question:

Is your employer lump sum payment assessable in the relevant year?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your employment was terminated late in the prior financial year. You had a dispute with your employer about a promised ownership interest, which was not granted. The dispute was litigated but did not go to court. A deed of settlement was signed.

Your employer paid you your unused holiday pay and long service leave by issuing a cheque, dated X, which you received on Y.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Subsection 6-5(4)  of the Income Tax Assessment Act 1997 (ITAA 1997) states in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

Subsection 6-5(4) of the ITAA 1997 was introduced into the taxation legislation under the Income Tax Assessment Bill 1996, with the following explanatory memorandum:

A generally accepted principle of tax accounting is that an amount accountable on a receipts basis can be your income, even if it has not been actually received, as soon as it is applied or dealt with in any way on your behalf or as you direct. In other words, an amount is treated as received as soon as the taxpayer gets benefit from it. This rule applies to both statutory income and ordinary income for amounts accounted for on a receipts basis. It is not limited to cases where a particular provision uses the word 'received' (eg. it can apply where a provision uses the word 'derived' and the amount in question is properly accounted for on a receipts basis).

Example: On your instructions, your employer pays part of your wages to a health fund to meet your liability to pay health insurance contributions to the fund. You are taken to have received the amount when your employer paid it to the fund and, therefore, to have derived it as ordinary income then.

Paragraph 42 of Taxation Ruling TR 98/1, which is about the determination of income using the receipts versus earnings method, states:

Income from employment would normally be 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.

In No. 1 Board of Review Case D7 72 ATC 38, relying on the High Court case of Brent v. Federal Commissioner of Taxation 71 ATC 4195, it was decided a payment directed by the employee on 20 November 1964 to be paid on 1 July 1965, which was received on 1 July 1965 by a cheque dated 29 June 1965, was derived on 1 July 1965.

In your case, the same principles mentioned above apply. The cheque issued by your employer on X, which you received, by courier, on Y, was derived on Y and is therefore assessable income for the relevant year.