Edited version of private ruling

Authorisation Number: 1011841125318

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Ruling

Subject: Assessability of income protection insurance payments

Question

Are you assessable on payments received under an income protection insurance policy?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2008

Relevant facts

You are the sole director of the company.

You personally took out an income protection policy and you claim a deduction for the premiums you pay.

As the result of illness, you have made a claim and are receiving weekly payments under the policy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 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:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443;10 ATD 82). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).

Therefore periodic payments received during a period of total or partial disability under an income protection policy are assessable on the same principle as salary and wages. 

In Watson v. DFC of T [2010] FCAFC 17 2010 ATC 20-167 (Watson's case) the taxpayer was a self-employed financial planner who had taken out a professional income protection (PIP) policy to replace the commission or income which he would lose if he could not continue to work in his business through illness or injury.  In 1996 the taxpayer was diagnosed as having a brain tumour for which he underwent surgery. He made a claim under the policy and received payments. He sought to include, as the income of the business, his payments from the PIP policy.

He submitted that effecting and maintaining income protection insurance was part of the conduct of the business of financial planning, or at least incidental or related thereto.

It was held that the relevant payments had no causative connection with the business so that they could be regarded as income from the business or from the business activity.

Your case is similar to Watson's case. You took out an income protection insurance policy and you claimed a deduction for the premiums paid. While it is accepted that the business relies on you working to produce income, the payments you receive from the policy is not income from the business or from the business activity.

The payments you receive are ordinary income. Therefore, you are assessable on the income derived from the policy.

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