Medicare Levy - whether receipt of lump sum payment related to a period when a taxpayer was a 'prescribed person' is excluded from taxable income

Is a lump sum payment which related to a period when the taxpayer was a 'prescribed person', excluded from taxable income for the purposes of calculating the rate of Medicare levy under subsection 6(1) of the Medicare Levy Act 1986 (MLA 1986)?

No. A lump sum payment which related to a period when the taxpayer was a 'prescribed person', is not excluded from taxable income for the purposes of calculating the rate of Medicare levy under subsection 6(1) of the MLA 1986.

The taxpayer received an assessable lump sum compensation payment from the Department of Defence. At the time of receipt of the lump sum payment the taxpayer had ceased to be a Defence Force member.

The payment related to two earlier income years. The taxpayer had been a member of the Defence Force during those earlier years.

Paragraph 251S(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that Medicare levy is payable on the taxable income of a person who was a resident of Australia at any time during the relevant income year.

However, paragraph 251T(a) of the ITAA 1936 provides that the Medicare levy is not payable by a person who is a 'prescribed person' during the whole of the year of income. A 'prescribed person' is defined to include a member of the Defence Force (paragraph 251U(1)(a) of the ITAA 1936).

The taxable income of a person includes any lump sum payment that was assessable income of the year of income. Such payments are assessable in the year of receipt.

The lump sum payment to the taxpayer related to a period when the taxpayer was a member of the Defence Force and consequently was a 'prescribed person'. However, the lump sum payment was made to the taxpayer at a time when the taxpayer was no longer a member of the Defence Force and therefore no longer a 'prescribed person' within the definition of paragraph 251U(1)(a) of the ITAA 1936. The lump sum payment is therefore included in taxable income for the purposes of calculating the Medicare Levy under subsection 6(1) of the MLA 1986. It is not relevant that the taxpayer may have been a 'prescribed person' during the earlier years to which the payment relates.