Edited version of your private ruling

Authorisation Number: 1012526607890

Ruling

Subject: Lump Sum Payment In Arrears Offset

Question 1

Are lump sum payments from an income insurance claim eligible for the lump sum payments in arrears tax offset?

Answer

No.

Question 2

Is interest income eligible for lump sum payment in arrears tax offset?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You commenced an Income Insurance Policy a number of years ago.

You were in an accident and suffered injuries.

You made a claim under the income insurance policy soon after.

After many years in dispute with the insurance company, you were finally paid several lump sum payments relating to your prior years income and interest.

Relevant legislative provisions

Taxation Administration Act 1953 Section Sch1-12-120

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1936 Section 159ZRA

Income Tax Assessment Act 1936 Subsection 159ZR(1)

Reasons for decision

Lump sum payment in arrears tax offset

Lump sum payment - salary and wages

A lump sum payment in arrears (LSIA) is a payment received in one tax year that includes income that accrued in previous tax years. As your LSIA were from a successful insurance claim and was based on your prior years salary, it is considered income according to ordinary concepts and is included in assessable income under section 6-5 of the Income Tax Assessment Act 1997. Although the income in arrears may have been accrued in previous years, it is taxed in the year of receipt, the same as salary and wage accrued in normal circumstances.

To alleviate the problem of more tax being payable in the year in which the lump sum is received (than would have been payable if the lump sum had been taxed in each of the years in which it accrued), section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936) allows individual taxpayers who receive certain eligible assessable LSIA payments a LSIA Tax Offset.

To be eligible for the LSIA Tax Offset a taxpayer must satisfy the following conditions:

1. the taxpayer must have received a lump sum payment of eligible income that accrued, in whole or in part, in an earlier year or years of income, and

2. the amount of the lump sum which accrued before the year of receipt must not be less than 10% of the taxpayer's normal taxable income of the year of receipt.

Subsection 159ZR(1) of the ITAA 1936 lists the type of payments that are eligible for the LSIA Tax Offset, and includes a payment covered by section 12-120 in Schedule 1 to the Taxation Administration Act 1953. This section states that an eligible payment is:

(a) made for an individual's incapacity for work; and

(b) calculated at a periodical rate; and

(c) not a payment made under an insurance policy to the policy owner.

In your case, you received lump sum payments relating to a successful income insurance policy claim. As these payments were made under an insurance policy to you (the policy owner), they are not considered eligible payments under subsection 159ZR(1) of the ITAA 1936, and an arrears tax offset cannot apply to those payments.

Lump sum payment - interest

As discussed above, subsection 159ZR(1) of the ITAA 1936 lists the type of payments that are eligible for the LSIA Tax Offset. That subsection does not include interest income as eligible income, even where the interest relates to a LSIA payment. Therefore an LSIA Tax Offset cannot apply to interest payments received.

Please note, although you may be disadvantaged by the fact that most of the income from the insurance payout is assessable in the one financial year, the Commissioner does not have the discretion to allow the income to be assessable in the financial years that the payments relate.