Edited version of your private ruling

Authorisation Number: 1012436063760

Ruling

Subject: Travel insurance

Question 1

Are you as an employer entitled to a deduction for the cost of travel insurance for your employee?

Answer

Yes.

Question 2

Are the proceeds of any insurance claim made on the policy that is paid directly to the employee regarded as your assessable income?

Answer

No.

Question 3

Will the life cover and death and capital benefits proceeds be assessable as ordinary income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts

You are an employer.

From time to time your employees are required to travel in the course of their employment with you.

You wish to arrange a travel insurance policy designed to cover your employees during the course of their employment related travel.

You will be the owner of the policy and the beneficiaries under the policy will be your employees.

The insurance will cover:

§ death and capital benefits,

§ overseas medical and medical evacuation costs,

§ baggage, travellers cheques, travel documents and credit cards, money,

§ loss of deposits,

§ cancellation charges,

§ kidnap, detention, extortion and ransom,

§ extra territorial workers compensation,

§ hire car excess charges,

§ alternative employee expenses,

§ personal liability,

§ evacuation cover and personal safety,

§ life insurance, and

§ additional expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Detailed reasoning

Allowable deductions

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's case)),

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

Taxation Ruling TR 95/33 considers the issue of whether a deduction would be an allowable deduction by considering the subjective purpose, motive or intention in making the outgoing. The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

It may be necessary to examine the taxpayer's subjective purpose where there is no obvious commercial connection with the business activity or where the expense does not achieve its intended result. If an arrangement has an independent pursuit of some other objective, then the outgoing may not be deductible.

Generally, where a business pays expenses for their staff and the expense related to the assessable income of the business, a deduction is allowable.

In this case, you are paying travel insurance expenses for your employees. Travel insurance expenses are inherently private in nature. This was highlighted in Case T78 86 ATC 1094 where a claim for travel insurance was found to be expenditure of a private and domestic nature and therefore not deductible. Travel insurance policies invariably cover items that are generally private in nature, for example, illness, loss of baggage and theft or damage to belongings.

However where a business pays for expenses for employees to undertake work related travel, a deduction is generally allowable. The expenses incurred for travel insurance for your employees is considered to be sufficiently connected to the business income. Therefore you are entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of the insurance.

Assessable income

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

Generally speaking, a receipt will be income according to ordinary concepts if it is a receipt arising out of a taxpayer's employment, business activities or income producing activities. This will be so even if the receipt is not directly related to any service provided by the recipient to the donor (FC of T v Dixon (1952) 86 CLR 540; (1952) 5 ATR 443;10 ATD 82 (Dixon's case)).

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (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).

Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation/settlement payment is assessable, and states that such a payment is assessable income:

· if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined), or

· to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.

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).

In this case, the insurance is not considered to relate to your revenue expenses. Where an insurance payout is made to an employee, this amount will not be assessable income to you.

Should you receive an amount for life cover, or death or capital benefits, such an amount is generally capital in nature and not assessable under section 6-5 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).