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Edited version of your written advice
Authorisation Number: 1013022274981
Date of advice: 23 May 2016
Ruling
Subject: Lump sum in arrears tax offset
Question 1
Are you entitled to a lump sum payment in arrears tax offset?
Answer:
Yes
This ruling applies for the following period:
Year ended 30 June 20
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
As a result of a Conciliation/Arbitration hearing you received a lump sum payment as a workers' compensation payout covering the 20WW/XX and XX/YY financial years.
The lump sum payment represented a back-payment of weekly compensation that substituted for income during the period.
An amount of tax was withheld from your payment.
You have tried unsuccessfully to obtain an amended payment summary that shows the lump sum at label E.
You have calculated the breakdown of the lump sum over the 20WW/XX and XX/YY financial years and included this information in your 20YY/ZZ income tax return.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 6-5
Income Tax Assessment Act 1997 - Section 8-1
Income Tax Assessment Act 1997 - Section 59-30
Income Tax Assessment Act 1936 - Section 159ZRA
Reasons for decision
The lump sum payment you received accrued in earlier income years and is greater than 10% of your taxable income therefore, you are entitled to the lump sum in arrears tax offset.
Detailed reasoning
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.
An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82). Compensation payments that substitute for income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR 1516). The payment retains the characteristics of ordinary income even though it is paid as a lump sum.
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 the case of interest or investment income, the general principle is that it is only derived, or arises, when it is received or credited
You received a lump sum payment in the 20YY-ZZ financial year. The lump sum amount represented a back-payment of weekly compensation payments that substitute for income. As this amount was received in the 20YY-ZZ financial year it is fully assessable in that year. This is the case even though part of the payment relates to earlier income years.
Lump sum in arrears tax offset
Individual taxpayers, who receive certain 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.
To be eligible for the rebate, the amount of the eligible lump sum must not be less than 10% of the taxable income of the year of receipt after deducting the amount of the eligible lump sum that accrued in earlier years and other income. Other income includes abnormal income, net capital gains, Eligible Termination Payments (ETPs) and lump sum payments on termination of employment in lieu of annual leave or long service leave.
The lump sum payment you received accrued in earlier income years and is greater than 10% of your taxable income, therefore, you are entitled to the lump sum in arrears tax offset.
It is noted that you have included the relevant information in your 20YY/ZZ income tax return and the tax offset will be calculated for you.