Edited version of your written advice

Authorisation Number: 1012776482394

Ruling

Subject: Income-assessability

Question 1:

Are the disability payments and interest payment you received assessable in the year in which they are received?

Answer:

Yes.

Question 2:

Are you entitled to a lump sum in arrears offset?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts

You are the owner of insurance policy (the policy).

You suffered an injury.

You lodged a claim against the policy.

You received a number of payments and interest.

The payments were in reference to policy held with your insurer.

The back payment was also received due to a dispute between you and your insurer.

The payments were paid for the income you lost as a result of your injury.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1936 Section 159ZRA.

Income Tax Assessment Act 1936 Subsection 159ZR(1).

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.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts.

In your case you were in receipt of a number of payments. These payments effectively replace your income from salary and wages.

Accordingly, the payments and interest payment can be characterised as income according to ordinary concepts and is therefore included as assessable income within the terms of subsection 6-5(2) of the ITAA 1997.

Timing

In determining the basis of derivation of income, paragraph 42 of Taxation Ruling 98/1 states that:

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 your case, you received a payment and an interest payment being back payments for previous financial years. Regardless of what period the payment is for, under the receipts basis, these payments are included in your assessable income in the financial year they are received.

Lump sum in arrears and income protection payments

Section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936) allows a lump sum payment in arrears tax offset where the taxpayers assessable income in a year of income includes one or more eligible lump sums.

An eligible lump sum is defined as a lump sum payment of eligible income received on or after 1 July 1986 that is included in the assessable income of the taxpayer and accrued, in whole or in part, in an earlier year or years of income (subsection 159ZR(1) of the ITAA 1936).

Eligible income is defined in subsection 159ZR(1) of the ITAA 1936 to mean certain specified types of income. Paragraph 159ZR(1)(c) of the ITAA 1936 includes in this definition payments covered by section 12-80 or section 12-120 in Schedule 1 to the Taxation Administration Act 1953 (TAA). Section 12-120 in Schedule 1 to the TAA refers to a payment that is; 

• in respect of an incapacity for work;

• calculated at a weekly or other periodical rate; and

• is not a payment made under an insurance policy to the policy owner.

In your case, the back payment was made under a policy of insurance to you where you were the owner of the policy. Therefore, this back payment is excluded from the definition of eligible income and consequently is not an eligible lump sum. Accordingly you are not entitled to a lump sum in arrears tax offset under section 159ZRA of the ITAA 1936.