Edited version of your written advice

Authorisation Number: 1012991714051

Date of advice: 1 April 2016

Ruling

Subject: Lump sum compensation payment

Question and answer:

Is a lump sum compensation payment for lost income, assessable income?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You received a lump sum compensation payment of $.

The lump sum payment was to compensate you for lost income.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 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.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

• Are earned;

• Are expected;

• Are relied upon; and

• Have an element of periodicity, recurrence or regularity.

Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

As such, the lump sum payment you received for loss of income is income according to ordinary concepts.

Income is assessable for income tax purposes, under subsection 6-5(4) of the ITAA 1997, when the person is taken to have derived it. The term derived is explained in the subsection to mean that the amount is derived when it is received or applied or dealt with in any way at the person's direction.

In your case, you received the total lump sum income payment in the relevant income year. Under subsection 6-5(4) of the ITAA 1997, the total amount is considered to be derived in the relevant income year and, therefore, the total amount is assessable in the relevant income year.

Whilst we appreciate your situation, the Commissioner has no discretion available to assess this lump sum amount in any years other than the one in which it was received, including the situation described by you.

The following information regarding the Lump sum in arrears tax offset may assist you:

Lump sum in arrears tax offset (LSIA)

Individual taxpayers, who receive certain eligible assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in each of the years in which it accrued.

The following income is eligible for the rebate (s 159ZR):

a)salary or wages to the extent to which they accrued during a period ending more than 12 months before the date on which they are paid

b) salary or wages paid to a person after re-instatement to duty following a period of suspension of the person from duty, to the extent to which the salary or wages accrued during the period of suspension

c) a payment covered by section 12-80 or 12-120 in Schedule 1 to the Taxation Administration Act 1953

d) a Commonwealth education or training payment (see subsection 6(1))

e) income by way of compensation for sickness or accident pay in respect of an incapacity for which is covered by Income Tax Assessment Act 1997 Division 52, 53 or 55 but that is not exempt from income tax under that Division

f) a payment under a law of a foreign country that is similar to a payment covered by paragraph (e)

g) but does not include so much of any such amount as was taken into account in calculating the amount of a tax reimbursement payment by the Commonwealth that was authorised under section 33 of the Financial Management and Accountability Act 1997.

To be eligible for the LSIA tax offset a taxpayer must satisfy the following conditions:

a) 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

b) the amount of the lump sum payment which accrued before the year of receipt, must not be less than 10% of the taxpayer's normal taxable income (less the amount of the lump sum which accrued before the year of receipt) in the year the lump sum was received.