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Edited version of private ruling

Authorisation Number: 1011581228556

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Ruling

Subject: whether the proceeds of an income protection insurance policy are assessable

Is the income received under an income protection policy paid for by your employer assessable?

Yes.

Relevant facts and circumstances

You had an income protection insurance policy for which your employer paid the premiums for you.

You were out of work for about three months. During this time, the insurer made a number of payments to you under the policy.

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Based on case law, it can be said that ordinary income generally includes receipts that:

Payments of salary or wages, including payments made under an insurance policy that replaces salary or wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

The question of whether amounts paid under an insurance policy in lieu of income are assessable was considered by the High Court in Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; (1981) 81 ATC 4114; (1981) 11 ATR 538 (Smith's case). In that case, the taxpayer was a medical practitioner employed by a hospital. He was injured in a traffic accident on 19 October 1977 and was disabled until 16 February 1978. For that period he received $2,112 under the terms of a personal disability insurance policy which he had taken out some years earlier.

It was held by the Full High Court that the amount of $2,112 was assessable. In their joint judgement Gibbs, Stephen, Mason and Wilson JJ said that, in their opinion, the conclusion was inescapable that the purpose of the policy was to diminish the adverse economic consequences of injury by accident. It was to provide a monthly indemnity against the income loss arising from the inability to earn. The revenue nature of the benefits was clearly stamped upon them during the period of four months during which the insured was totally disabled from earning.

The decision in Smith's case confirms the Commissioner's practice of including periodic benefits payable under a disability insurance policy as assessable income. It is considered that had an income protection insurance policy been the relevant policy in Smith's case the decision would have been the same.

In your case, you were out of work and received benefits under an income protection policy taken out by your employer. The purpose of this policy was to provide you with income in the event of you being unable to work. The amount paid under the policy was earned because of your rights under the policy. It was also expected, relied upon and had an element of periodicity, recurrence or regularity.

The regular payments received under the policy are thus income according to ordinary concepts. The fact that your employer paid the premiums on the policy does not change the nature of the income received by you in any way.

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