Edited version of private advice

Authorisation Number: 1051868601408

Date of advice: 19 July 2021

Ruling

Subject: Lump sum payment in arrears tax offset

Question 1

Are you entitled to the lump sum payment in arrears tax offset in relation to the lump sum workers compensation payment you received?

Answer

Yes.

Question 2

Are you able to make back-dated salary sacrifice contributions to your superannuation fund following the receipt of the workers compensation payments?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You became ill and were unable to carry out your employment duties.

You eventually resigned from your employment.

You lodged a workers compensation claim in respect of your medical condition.

You subsequently received a lump sum workers compensation payment.

The payment represented weekly payments for a period of time covering three income years (or part thereof), based on a percentage of your pre-injury average weekly earnings.

You also received weekly workers compensation payments for a period of several months.

Your Lodging Agent did not include salary sacrifice as part of its payment system. The salary sacrifice component was not taken out of your payments.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23L

Income Tax Assessment Act 1936 section 159ZR

Income Tax Assessment Act 1936 section 159ZRA

Taxation Administration Act 1953 section 12-120 Schedule 1

Reasons for decision

Lump sum payment in arrears tax offset

Income in the nature of employment income and pension income is generally derived only when received. Accordingly, back payments of income that relate to an earlier income year or years will be assessable only in the year of receipt.

Section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936) allows an income tax offset in relation to certain lump sum payments that accrued in a prior year or years.

The lump sum payment in arrears tax offset is designed to alleviate the problem of more tax being payable in the year in which the lump sum payment is received than would have been payable if the lump sum payment had been taxed in the years in which it accrued.

The offset is available in the year an 'eligible lump sum' is included in a taxpayer's assessable income and the total arrears amount is not less than 10% of the amount remaining after deducting that total arrears amount from the normal taxable income of the current year (subsection 159ZRA(1) of the ITAA 1936).

Eligible lump sum payments include those relating to back payments of compensation, sickness or accident pay for incapacity to work (subsection 159ZR(1) of the ITAA 1936).

When lodging your income tax return, you will need to follow the supplementary income tax return instructions and provide the following information:

•       the full amount of the lump sum payment you received to be shown at label 24 Other income (this description may differ if using myTax)

•       the income tax years to which the payment related and the amount attributable to each year.

The ATO will calculate the tax offset for you.

Back-dated salary sacrifice superannuation contributions

It is only possible to make concessional superannuation contributions where an 'effective' salary sacrifice arrangement is in place between an employee and employer.

An effective arrangement involves the employee agreeing to receive part of their total amount of remuneration as benefits (such as superannuation) before the employee has earned the entitlement to receive that amount as salary or wages.

An ineffective arrangement involves the employee directing that an entitlement to receive salary or wages that has already been earned is to be paid in a form other than salary or wages.

Further, a contribution to a superannuation fund is only 'made' when it is received by the fund. Therefore, no back-dating of contributions to a prior date or year is possible.

Notwithstanding your difficult circumstances, you are unable to back-date payments to your superannuation fund on a concessional basis as you did not have an effective salary sacrifice arrangement in place with an employer prior to receiving the workers compensation payments, and payments to a superannution fund are unable to be back-dated to a prior date or year.