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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051308764813

Date of advice: 23 November 2017

Ruling

Subject: Insurance payments

Question 1

Are the monthly payments received under your income protection policy, assessable income?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You have an income protection policy which covers you for other benefits including Total and permanent disability.

You injured yourself and were no longer able to work.

You lodged a claim with your insurer for payments under your policy once you became injured and received a diagnosis from your treating doctor.

You have been receiving monthly payments from your insurer due to your inability to work.

The amount of the benefit they pay is the monthly amount insured as at the date that entitlement to the benefit arises. This amount is determined by the life insured’s annual income.

The insurer pays the benefit if the life insured is totally disabled and meets the eligibility conditions.

To be eligible for the benefit you must have been totally disabled for the waiting period, disabled for the remainder of the waiting period and continuously disable since the end of the waiting period.

You are unable to perform any duties in relation to your pre-disability occupation. You are currently not working.

Relevant legislative provisions

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

Reasons for decision

Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)).

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:

You have received payments due to an injury you have suffered. The payments received represents monthly amounts of income that would be considered to be income received if you were still working. The payments are compensating for that replacement of income therefore compensating for loss of earned income.

Payments to replace income are considered to be income. 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) 5 ATR 443; 10 ATD 82).

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 the total disability benefit payments, it is necessary to consider the terms of the particular policy and the reason for making the payments.

In your case, the benefit as part of you income protection policy is to protect and provide income in the event of injury, sickness or disability. The purpose of the total disability benefit is to fill the place of your lost income during your disability. The regular payments received in relation to this policy replaced lost earnings. The purpose of the payments is 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 payments are expected, recurring and relied upon.

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

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