Edited version of private ruling

Authorisation Number: 1011442834934

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Ruling

Subject: Lump sum comprehensive income protection plan payments

Should the lump sum payments from your comprehensive income protection plan be included in your assessable income for the 2008-09 income year?

Yes.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have comprehensive income protection plan (the policy).

You have provided a copy of the policy and this policy has been considered and forms part of the scheme upon which this ruling is based.

The policy pays fortnightly benefits where because of sickness or disability you are unable to work.

You received three lump sum payments in the 2008-09 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The character of the lump sum payments paid to you is to replace income for the loss of earnings as a result of suffering a disability under the terms of your comprehensive income protection plan and is therefore considered to be ordinary assessable income.

Detailed reasoning

Assessability of lump sum payment

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.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

The lump sum payments you received will be assessable under section 6-5 of the ITAA 1997 if it is found to be ordinary income. This will depend on whether the amount is payable in respect of the loss of earnings or in respect of the loss of earning capacity.

Payments to replace income are also considered to be income (Keily v. FC of T 83 ATC 4248; (1983) 14 ATR 156). 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) 10 ATD 82; (1952) 5 AITR 443; (1952) 10 ATD 82).

Compensation payments which substitute income have also been held by the courts to be income according to ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142; (1989) 20 ATR 1516) and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).

In addition to this, it is well established that, in general, insurance moneys are received on revenue account where the purpose of the insurance was to fill the place of the revenue receipt which the event insured against has prevented from arising (Carapark Holdings Ltd v Federal Commissioner of Taxation (1967) 115 CLR at 633). Thus, amounts payable under a policy that provides a monthly indemnity against income loss arising from inability to earn are of a revenue character (Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578 at 583-84; (1981) 81 ATC 4114 at 4116; (1981) 11 ATR 538 at 540-41).

Therefore, periodic payments received during a period of total or partial disability under a personal accident or disability insurance policy are assessable on the same principle as workers' compensation payments. Weekly or periodic workers' compensation payments (or periodic payments under other legislation) for loss of salary, either whole or in part, are assessable as ordinary income.

The character of a lump sum compensation payment or insurance benefit is derived from the terms of the particular policy or legislation and the reason for making the payment.

In your case, the lump sum payments are a result of a comprehensive income protection plan taken out by you. The character of the lump sum paid to you is to replace income for the loss of earnings as a result of suffering a disability under the terms of the policy and is therefore considered to be ordinary income.

Derivation of income

As noted under section 6-5 of the ITAA 1997, ordinary income is assessable in the income year in which it is derived.

Taxation Ruling TR 98/1 deals with the derivation of ordinary income and states that the general rule with non-trading income is that it is derived when it is received.

Subsection 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it was derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.

In your case, the payments are for loss of earnings and subsequently included as part of your assessable income for the 2008-09 income year when they were received.

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