Edited version of your written advice

Authorisation Number: 1013009168133

Date of advice: 11 May 2016

Ruling

Subject: Lump sum payment

Question

Are you entitled to a lump sum in arrears tax offset for the repaid salary sacrificed amount?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20ZZ

The scheme commenced on

1 July 20YY

Relevant facts

As an employee you had salary packaged an amount.

As a result of FBT changes from 1 April 20ZZ, all money accumulated and not spent is now to be withdrawn and paid to you as wages in the 20YY-ZZ financial year.

You have not salary sacrificed any amounts for a few years. All money accumulated was salary sacrificed in the 20VV-WW and 20WW-XX financial years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1936 Section 159ZR.

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are regarded as assessable income under subsection 6-5(2) of the ITAA 1997. Salary and wages are assessable in the year of receipt.

A salary sacrifice arrangement is an arrangement between an employer and an employee whereby the employee agrees to forgo part of their future salary entitlement in return for a benefit of a similar value. That is, the employee agrees to receive a lower amount of pay each payday in return for the employer providing them with benefits of a similar value to the reduction in pay.

The consequence of such an arrangement is that the employee is assessed on the reduced amount of the salary actually received and the employer is liable for any fringe benefits tax payable on the benefit provided.

As highlighted in chapter 1.11 of the Fringe benefits tax: a guide for employers, if a fringe benefit that has not been provided is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.

Therefore, as you received the payment in the 20YY-ZZ financial year, it is assessable in that income year.

In certain circumstances, a lump sum in arrears tax offset may be allowed. However, as outlined below, you are not entitled to a lump sum in arrears tax offset in relation to your payment.

Individual taxpayers who receive assessable lump sum payments containing an amount that accrued in earlier income years may be entitled to a 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 the year in which it accrued.

A tax offset is allowed where an individual receives a lump sum payment for certain kinds of payments in arrears, that is, the payment should have been made in earlier years but is instead made at a later time in a lump sum.

In your case, you chose to salary sacrifice amounts in the 20VV-WW and 20WW-XX financial years. That is a benefit was given to you in those earlier relevant years.

The lump sum payment received in the 20YY-ZZ financial year is not a payment of salary and wages that were never paid to you in those previous years. The money was available to you in those previous years and you had the use and benefit of the funds.

It was your choice to salary sacrifice an amount in the 20VV/WW and 20WW/XX financial years. That is you chose to reduce your assessable income in those years for a benefit. You actually received a benefit in the 20VV-WW and 20WW-XX financial years. That is an amount was put on your card for your use and benefit. Therefore the amount was paid to you in the 20VV-WW and 20WW-XX financial years.

A payment was made to you in the 20YY-ZZ financial year because you had unused funds. The lump sum does not arise because you never received wages in the 20VV-WW and 20WW-XX financial years. That is, the payment to you of the unused funds is not a lump sum payment for an amount that should have been made in earlier years.

The payment for unused amounts is not "eligible income" for lump sum in arrears tax offset purposes. The payment is an entitlement to unused benefits and not a payment for salary and wages that had accrued and never paid.

The fact that you did not fully use the amount is not a situation that allows for a lump sum in arrears tax offset. Had you spent all the money before 1 April 20ZZ, then no refund would have been made to you.

We acknowledge your specific circumstances, however, the legislation does not allow for lump sum in arrears tax offset in relation to your payment. Your payment is ordinary assessable income.