Edited version of private advice

Authorisation Number: 1052103593273

Date of advice: 5 April 2023

Ruling

Subject: Lump sum - deceased estate

Question 1:

Is the gross amount portion of the Payment assessable income for the Estate?

Answer:

Yes.

Question 2:

Is the interest amount portion of the Payment assessable income for the Estate?

Answer:

Yes.

Question 3:

Is the Additional amount included in the Payment assessable income for the Estate?

Answer:

No.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A experienced a medical condition which resulted in them receiving weekly payments from a Government agency (the Agency) while they were alive to compensate them for their loss of earnings due to their illness.

Person A (the Deceased) passed away and you were appointed as the trustee (the Trustee) of the Deceased's estate (the Estate).

The Agency sent a letter to the Trustee which is summarised as follows:

•         They operate the scheme under which the Deceased had received their weekly compensation payments and it had been identified that the Deceased had been underpaid their weekly compensation payments during a specified period of time

•         The underpayment amount was based on what the Deceased would have been earning if they were still employed in their occupation related to their illness; and

•         The Agency had calculated that the Deceased had been underpaid and they would pay a lump sum amount (the Payment) that included gross amounts, interest amounts, and an additional amount (the Additional amount) that was to cover any out-of-pocket expenses incurred while obtaining advice as to how the remediation payment may affect the Estate's circumstances.

The Payment was paid into the Trustee's bank account.

The Estate had not been wound up when the Payment was received.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1936 section 101A

Reasons for decision

Assessable income

Payments for rendering personal services, such as salary or wages, are ordinary income and are included in assessable income under section 6-5 of the Income Tax Assessment 1997 (ITAA 1997).

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Commissioner of Taxation (Cth) v Dixon [1952] HCA 65) and compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v Inkster [1989] FCA 626).

Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.

Income of deceased received after they have passed away

If the trustee of the estate of a deceased person receives any amount that would have been assessable income in the hands of the deceased person if it had been received during their lifetime, that amount must be included in the assessable income of the trust estate in the year in which the amount was received when the deceased estate has not been fully administered under section 101A of the Income Tax Assessment Act 1936 (ITAA 1936).

Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates outlines the various stages during administration of a deceased estate.

Application to this situation

The Deceased received weekly payments while they were alive to compensate them for their loss of earnings due to their illness.

It was identified that the Deceased had been underpaid in relation to those weekly payments for a specified period while they were alive when the Agency had recalculated the Deceased's entitlements, with a remediation payment being made to rectify and compensate for the underpayment of the weekly payments, the Payment.

The components included in the Payment are considered below:

Gross amount and interest amount

Gross amounts and interest amounts were included in the Payment. As outlined above, the gross amount and the interest amount will acquire the character of that for which they are substituted.

In this case, the gross amount was paid in relation to the underpaid weekly compensation payments the Deceased was entitled to receive when they were alive during a specified period, which would have been assessable to the Deceased if they had received any of it when they were alive.

The interest portion of the Payment is viewed as being a payment of compensation for the loss of the unpaid gross amount that the Deceased should have received during the specified period.

The payment of the gross amount and interest amount does not change the characterisation of those amounts but reflects that this was a remediation payment arising from the recalculation of the Deceased's entitlement to their assessable weekly compensation payments which were income in nature.

Therefore, it is viewed that as these amounts would have been assessable to the Deceased if they had received them when they are alive, they are assessable to the Estate in the income year in which they were received under section 101A of the ITAA 1936.

Additional amount

The Additional amount was paid to cover any out-of-pocket expenses that may be incurred in obtaining advice in relation to the taxation implications for the Estate on the receipt of the gross amount and interest amounts.

Therefore, as this amount does not take on the characteristic of assessable income it is not assessable to the Estate.