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Ruling

Subject: Assessable compensation payment

Question and answer:

Is the lump sum payment that you received for the finalisation of your salary continuance claim assessable as ordinary income?

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts

You are currently under 65 years of age.

You were employed in the entertainment industry.

You incurred a work related injury.

As a result of the injury you are partially disabled and will not be able to work again.

You have been unemployed since the injury occurred.

After a period, you received a final lump sum temporary salary continuance payment from an insurance company.

The lump sum payment that you received included accrued amounts from previous years.

You have been informed by the insurance company that there will be no further temporary salary continuance benefits payable once the payment is made.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 6-5.

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Salary and wages are considered ordinary income according to ordinary concepts.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82).

Taxation Determination TD 1999/36; Income tax: should salary continuance benefits, paid to a member of a superannuation fund as a result of having a temporary disability, be reported for Reasonable Benefit Limits (RBL) purposes?, provides the Commissioner interpretation of a salary continuance payment.

Paragraph 2 and 3 of Tax Determination TD 1999/36 state;

2. Salary continuance benefits are insured benefits payable in the event of the temporary disablement of an employee or self-employed person who is a member of the superannuation fund. The benefits are designed to be paid, in full or in part, during prolonged absence from employment or income producing activities because of temporary disability, to:

· replace the salary of an employee;

· provide a minimum level of income to a self-employed person; or

· compensate the policyholder for the salary paid to the employee.

3. The insurance is usually taken out by an employer, a self-employed individual or the trustee of a superannuation fund. Sometimes the benefit is self-insured. The insurance is to cover events which are in the nature of temporary disablement and prevent the member from undertaking income producing activities. The benefit is usually paid periodically while the disablement continues.

In your case, you were in receipt of a lump sum temporary salary continuance payment. The payment has been made as a means of substitution for the salary and wages that you would have earned were it not for the injury that you incurred while you were for filling your employment duties. As the payment is a substitute for lost salaries and wages it is considered ordinary income according to ordinary concepts.

Accordingly, as the lump sum payment is viewed as ordinary income it is subject to Australian income tax under section 6-5 of the ITAA 1997.