Edited version of your written advice

Authorisation Number: 1051205744691

Date of Advice: Ruling

Subject: Lump sum in arrears tax offset

Question

Are you entitled to a lump sum in arrears tax offset?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

You operate a business through a partnership.

You have received payments from your Income Protection Insurance Policy.

In the 2014-15 financial year you received two lump sum payments under the policy that related to lost business income from the Partnership in the 2013-14 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1936 Section 159ZR

Income Tax Assessment Act 1936 Section 159ZRA

Taxation Administration Act 1953 Section 12-120

Reasons for decision

Detailed reasoning

Lump sum payment in arrears tax offset

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 person is entitled to a lump sum payment in arrears tax offset where:

The assessable income of the taxpayer of a year of income includes an eligible lump sum, and;

The total arrears amount is not less than 10% of the amount (if any) remaining after deducting the total arrears amount from the normal taxable income of the current year.

Eligible lump sum means a lump sum payment of eligible income.

Eligible income is defined in subsection 195ZR (1) of the ITAA 1936, and paragraph c is relevant in your case as it covers income by way of compensation in respect of an incapacity for work as follows:

A payment covered by section 12-80 or 12-120 in Schedule 1 to the Taxation Administration Act (TAA)1953

Under Section 12-120 of the TAA 1953 (Compensation, Sickness or Accident Payment):

An entity must withhold an amount from a payment of compensation, or of sickness or accident pay, it makes to an individual if the payment:

(a). Is made because of that or another individual's incapacity for work; and

(b). Is calculated at a periodical rate; and

(c) Is not a payment made under an insurance policy to the policy owner.

In your case you are the owner of the policy. Therefore the lump sum payments made under the insurance policy to you which replaced lost business income is not regarded as eligible income.

As you have not received 'eligible income' for the lump sum payment in arrears tax offset purposes, you are not entitled to a tax offset under section 159ZRA of the ITAA 1936.

You have made the following contentions in your ruling application:

The intention of the offset is to assist taxpayers who are disadvantaged in similar circumstances.

It seems to apply mainly where lump sums in arrears are received relating to lost Salary and Wages rather than business income.

You do not believe the fact that the insurance company was not required to withhold tax from the lump sum payment should exclude the amount from being classed as eligible income for the offset.

Whilst we acknowledge that 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, there is no discretion in the legislation to allow for special circumstances.

Derivation of income

In your application you stated that it was your view that compensation and insurance payments relating to lost income are taxed in the year that they are received.

We have examined this and confirm this is correct.

In your case, the lump sum payments are a result of an income protection policy taken out by you. The character of the lump sum paid to you is to replace income for the loss of earnings as a result of suffering a disability under the terms of the policy and is therefore considered to be ordinary income.

Taxation ruling TR 98/1 Income tax: determination of income; receipts versus earnings 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.

In your case, the payment is for loss of earnings and under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) it is assessable in the 2014-15 financial year. Although some of the lump sum payment accrued in an earlier year, the lump sum is assessable income in the year of receipt.