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Edited version of your written advice
Authorisation Number: 1051363133369
Date of advice: 18 April 2018
Ruling
Subject: Lump sum payment for compensation
Question
Can the lump sum compensation payment received in 2017 income year be assessed in the 2014 income year?
Answer
No
This ruling applies for the following period:
Period ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You were employed by X in the 2014 financial year.
You had sustained an injury that required you to be off work in 2010.
The departments’ insurer was insurance firm A.
You lodged a claim with insurance firm A for workers compensation.
Your claim initially was not accepted.
You took long service leave for 10 months.
In late 2015 insurance firm A accepted your claim for compensation.
There was no finalisation of that claim.
Your employer changed providers for work cover to insurance firm B
Initially they refused to honour the decision made by insurance firm A.
You followed through with a Conciliation claim with insurance firm B.
The outcome was a lump sum payment in compensation for failure to re-credit long service leave entitlements. The decision was made in late 2016.
You were paid a lump sum in compensation in early 2017
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1936 subsection 25(1)
Reasons for decision
Lump sum payment included in assessable income
In determining whether a lump sum receipt is included in assessable income, it is necessary to determine whether that receipt is of a capital or revenue nature.
Taxation Determination (TD) 93/58 considers the circumstances under which a lump sum receipt is assessable under the former subsection 25(1) of the Income Tax Assessment Act 1936 which has subsequently been replaced by section 6-5 of the ITAA 1997.
Which year was the income derived?
Taxation Ruling TR 98/1 considers the appropriate method of determining when income is derived under subsection 6-5(2) of the ITAA 1997 where income is earned in one tax year but received in another. Paragraph 42 of TR 98/1 states that salary and wages or other employment remuneration is assessable on a receipts basis. This is irrespective of whether that income relates to a past or future income period.
Lump sum payments in arrears are payments that relate to an earlier income year or years. Therefore, a lump sum amount of assessable income in arrears will be included in a taxpayer’s taxable income in the year in which it is received even when it relates to an earlier year of income.
Application to your circumstances
As your lump sum payment arose as compensation for failure to be re-credited leave, it is considered to be assessable under section 6-5 of the ITAA 1997.
Furthermore, the amount is considered to have been derived in the year of receipt, which in your case is the year ended 30 June 2017. The fact that the payment may relate to an earlier year does not alter the outcome and the relevant legislation does not afford the Commissioner with discretion to treat the amount as having a relationship to a different year of income.
As a result, the compensation amount is considered to be assessable in full in the year ended 30 June 2017.