Edited version of your written advice

Authorisation Number: 1051328822392

Date of advice: 19 January 2018

Ruling

Subject: Lump sum in arrears

Question

Is the lump sum payment you received assessable in the year ended 30 June 20XX?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You suffered an injury at your workplace in 20XX.

At the time of injury and after various medical reports, you were unable to work.

Upon contacting your superannuation in 20XX, you were informed that you had Income Protection Insurance (Relevant Policy).

Your superannuation fund is a standard fund that was set up with your employer and you were not aware you had Relevant Policy.

You were paid income protection benefits from Relevant Policy.

They were paid in a lump sum in 20XX financial year.

The tax was calculated on the income as if you were to receive the income in the financial years that they were applicable. This being as follows:

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

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.

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.

Subsection 6-5(4) of the ITAA 1997 states that in working out whether you have derived an amount of ordinary income, and when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

In your case, the lump sum income protection benefit you received is a payment for wages in arrears and so is fully assessable as ordinary income. It is assessable in the income year ending 30 June 20XX because it was received in that year. This is the case even though part of the payment relates to earlier income years.