Edited version of private advice

Authorisation Number: 1052011829815

Date of advice: 27 July 2022

Ruling

Subject: Assessable income - lump sum

Question

Are the Settlement Monies received under the Deed of Release assessable income in the financial year ended 30 June 20XX?

Answer

Yes.

This ruling applies for the following period:

The income year ended 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

You were an employee of your Employer.

You were insured by your Insurer under their Personal Accident and Sickness Policy (the Policy).

You were working from home one day when you had a medical episode. You had surgery in the following days.

You did not recover well from your surgery and were unable to return to your pre-injury duties with your Employer.

You were medically terminated from your employment with your Employer.

Your Insurer had been topping up your weekly wages under the Policy.

Your Insurer offered to pay you out a lump sum (the Settlement Monies).

You executed a Deed of Release (the Deed) between yourself as Releasee and your Insurer as Releasor.

The Deed released and discharged your Insurer with respect to any and all claims in relation to the Policy.

The Deed stated that the Settlement Money was a reduced lump sum payment of your full weekly entitlement under the Policy.

The Policy stated that Weekly Benefit payments are subject to personal income tax.

Your Insurer classified the full amount of the Settlement Monies as salary in your group certificate for the financial year ended 30 June XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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

Income Tax Assessment Act 1997 subsection 6-5(4)

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Income can be described as including receipts that are:

•         Received as a product of employment or services rendered

•         Earned

•         Received regularly or periodically

•         Expected

•         Relied upon.

Note that it is not necessary that all these characteristics be present for an amount to be considered ordinary income.

Income protection policies provide for periodic payments in the event of loss of income caused by the insured becoming disabled through sickness or injury. These payments are assessable as income under section 6-5 of the ITAA 1997, as they are paid to take the place of lost earnings. This view has been confirmed in Sommer v Federal Commissioner of Taxation 2002 ATC 4815.

A lump sum payment may also be considered ordinary income if it is a lump sum made up of periodic payments. The High Court in Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 held that an amount paid to compensate for loss generally acquires the nature of what that amount is substituting. Therefore, per the decision in Federal Commissioner of Taxation v Inkster (1989) 20 ATR 1516, lump sum compensation payments that substitute income are also income under ordinary concepts.

In your circumstances, your Insurer had been topping up your weekly wages, before offering to pay you out the Settlement Monies as a lump sum. The wage top ups took the place of lost earnings and are assessable as ordinary income under section 6-5 of the ITAA 1997.

Your Settlement Monies are described within the Deed as being a reduced lump sum payment of your full weekly entitlement under the Policy. Therefore, it follows that because your weekly entitlement under the Policy (the wage top up) was assessable as income, your Settlement Monies are also assessable income.

Subsection 6-5(4) of the ITAA 1997 provides that when working out whether you have derived an amount of income, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf. You received the Settlement Monies in the financial year ended 30 June XXXX. Therefore, you derived the full amount of the Settlement Monies and are assessable for that amount in the financial year ended 30 June XXXX.

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