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Edited version of your written advice
Authorisation Number: 1012980048613
Date of advice: 4 March 2016
Ruling
Subject: Assessability of your compensation payment
Question
Is the lump sum payment you received assessable as ordinary income in the year of receipt?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You received a single payment of workers compensation in the 20XX tax year.
A minor amount out of the total relates to monies owing for the 20XX year, with the remainder relating to the 20XX year.
You will not be able to meet the tax debt if the entire amount is assessable as income for the 20XX year.
You have provided documentation from the insurer which shows that the lump sum is replacing weekly amounts of income from the relevant tax years.
You are subject to financial hardship, are unable to work and have no access to Centrelink payments for a period of time.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-5(2)
Income Tax Assessment Act 1997 Section 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.
Workers compensation policies provide for periodic payments in the event of loss of income caused by a work-related injury or illness. These payments are assessable as income under section 6-5 of the ITAA 1997, as they are paid to take the place of lost earnings.
An amount received as a lump sum representing arrears of weekly 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 will need to be included as part of your assessable income in the financial year in which it is received. We acknowledge the circumstances and associated tax liabilities. However, the Commissioner has no discretion to assess the payment in any other income year.
Additional Note
Please note that you may be entitled to a lump sum in arrears offset in the financial year of payment. Whether an offset applies in your situation cannot be determined until you lodge your return for that year. For further information on lump sum payments in arrears please refer to our website at www.ato.gov.au