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Edited version of your written advice
Authorisation Number: 1051314991488
Date of advice: 12 December 2017
Ruling
Question 1
Are the payments you received assessable in the year of receipt?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You incurred work related injuries.
You received income protection payments.
The payments you received related to periods in previous income years.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 6-5(2)
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 ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
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 according to ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).
Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings sets out the Commissioner's policy on the derivation of income. Paragraph 42 of TR 98/1 states that income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period.
As your income protection payments replace salary, it is considered that the receipts basis is the correct method in your case. That is, the insurance payments are assessable when received.
This view is supported by Taxation Ruling IT 2107 which states that a lump sum payment in arrears of periodic workers’ compensation payments is assessable income in the income year it is received.
In Vargiemezis v. FC of T [2008] AATA 1152, the taxpayer had been incapacitated in the course of his employment and subsequently obtained a court order for a lump sum representing arrears of weekly compensation from his employer. The taxpayer requested a prior year amendment to apportion the lump sum over the year in which it accrued. It was held that the lump sum arrears was assessable in the income year it was received, notwithstanding that part of the amount was referable to a prior year.
Application to you circumstances
As income replacement payments replace salary, the receipts basis is the correct method of determining when the payments are assessable. Consequently, the income replacement payments you received are assessable in the income year they were received and form part of your taxable income for that income year. The Commissioner does not have any discretion to assess the payment in any other income year.