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Ruling

Subject: Disability insurance payments

Question

Are the monthly payments received under your disability insurance policy assessable income?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2003

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commenced on

1 July 2002

Relevant facts and circumstances

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

You have a disability insurance policy.

You receive monthly total disability payments under the policy.

You are unable to perform your pre-disability occupation.

You are not currently working.

In calculating the benefits payable on total disability, the payment is limited to a maximum of 75% of your fortnightly pre-disability assessed income.

Your monthly benefits will be made to you until you turn 65.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

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:

One or more of the following characteristics will combine with periodicity to give an amount an income nature:

Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

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 (Dixon's case)). 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).

In Dixon's case it was found that even if the receipts are not directly attributable to employment or services rendered, the expected regular periodical payments had the character of ordinary income.

Therefore periodic payments received during a period of total or partial disability under an insurance policy are assessable on the same principle as salary and wages. This is because the benefits are a replacement of employment income during the period of total or partial disability (FC of T v. D.P. Smith (1981) 147 CLR 578; 81 ATC 4114; 11 ATR 538).

In Scott v. FC of T (1966) 14 ATD 286, Windeyer J expressed the view that whether or not a particular receipt is income depends upon its quality in the hands of the recipient.

To determine the character of a disability insurance policy payment, it is necessary to consider the terms of the particular policy and the reason for making the payment.

In your case, your disability insurance policy is to protect and provide income in the event of injury, sickness or disability. The purpose of your disability insurance policy is to fill the place of your lost income after your disability. The regular payments received in relation to this policy replaced lost earnings (salary). The purpose of the payments is as a substitute for the income which would otherwise have been earned.

Your monthly payments provide you with an income support which you will be able to rely on for your day to day living expenses. The regularity of your payments and the full circumstances surrounding your case indicate an income nature. The monthly payment is expected, recurring and relied upon.

Your payments have the characteristics of ordinary income identified above and the payments are assessable under subsection 6-5(2) of the ITAA 1997.

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