Edited version of private advice

Authorisation Number: 1052247226000

Date of advice: 6 May 2024

Ruling

Subject: Assessable income - Trauma Recovery Benefit payment

Question:

Is the Trauma Recovery Benefit payment you received assessable under either section 6-5 or section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Employment

You commenced employment with Company D.

After several years your employment had been transferred from Company D to Company A to facilitate the sale of Company A to Company X.

Your last contract of employment was between you and Company D which included the following:

•         Subject to the acceptance level, medical assessment and terms and conditions of the Income Protection Policy, income protection is available 90 days after initial commencement. The Income Protection Policy does not form part of this Agreement; and

•         The remuneration paid in accordance with this contract of employment is in full compensation for all entitlements, benefits or payments that might otherwise be due pursuant to any industrial instrument that may apply to your employment, including but not limited to minimum weekly wages, overtime, penalty payments for out of hours work or working weekends and public holidays, leave loading, shift loadings; and any other loadings, penalties or allowances.

Company X's sick leave policy required that during a period of absence from work on medical advice and/or necessity, that the employee could use accumulated sick leave entitlements at the relevant time and any accumulated annual leave. If the employee remained unable to work beyond that period of available accumulated sick leave and annual leave, then unpaid leave could be taken.

Employer held insurance policy

A Group Salary Continuance (GSP) policy had been held by Company D for the benefit of its employees with Company Y, which included optional benefits including Trauma Recovery Benefits for when employees experienced one of the listed medical conditions.

The Product Disclosure Statement and Policy Terms (PDS) for the GSP includes the following information:

•         The insurance can be a great way to add value to employees' remuneration packages or offer competitive insurance through a superannuation fund. Cover is provided through a group policy, which means one contract - owned by an employer or superannuation fund trustee - providing cover for a group of employees or members of a complying superannuation fund.

•         The insurance provides a monthly benefit of up to 75% of salary for an insured member who is unable to work due to illness or injury. The flexible nature of the insurance allows it to be tailored to provide insurance cover for the group by choosing the most appropriate benefit design

•         There are numerous built-in benefits and features of the Policy listed, including a Continuation Option which allows an insured member to apply for an individual policy on favourable terms if they cease to satisfy the eligibility criteria

•         There are numerous optional benefits of the Policy listed, including Trauma Recovery Benefit; and

•         The definition of an 'insured member' refers to 'a person who is covered by the policy and is either an employee or contractor of an employer or partner in a partnership where the policy is employer owned, or a member of a complying superannuation fund where the policy is owned by the trustee of a complying superannuation fund'; and

•         The Trauma Recovery Benefit will be paid to an insured member if a trauma recovery event happens to the insured member while the policy in respect of the insured member is in force, which is payable whether or not the insured member is disabled. The benefit is payable during the waiting period with insured member's monthly benefit being paid in advance of each month until the earlier of specified events. This benefit is payable only once in respect of any insured member. Trauma recovery events included cancer (excluding early stage cancers).

Company X became the owner and beneficiary of the Group Salary Continuance Policy (the Policy).

You are an insured member of the Policy.

Company X paid for the insurance premium costs in relation to the Policy.

The claim and payment

You were diagnosed with a medical condition that was one of the listed medical conditions for eligibility for the Trauma Recovery Benefits provided under the Policy.

You ceased work with Company X on Date 1, being some weeks after your diagnosis.

After you ceased working you received the following from Date 1 during the ruling period:

•         Sick leave payments for several months

•         Annual leave for a short period; and

•         Reduced salary due to working part time.

During the above periods you received amounts calculated on the amount you would be entitled to receive if you had been working during the periods of sick leave and annual leave as you are a salaried employee, with no loadings or reductions, with tax being withheld by Company X. Amounts were also deducted during the period of paid leave superannuation in relation to amounts paid into your superannuation account.

A claim (the Claim) was made on your behalf once the waiting period has passed, with the application being made through your employer's broker, Company Z (the Broker).

Company Y contacted Company X seeking their directive on whether they should make the payment in relation to the Claim directly to Company X so that they could remit it to you, or to make the payment directly to you.

Company X directed Company Y to make the payment directly to you.

You were sent an email from a representative of Company Y, being Person A, advising that they had completed their assessment of the Claim, which had been accepted, providing the gross amount in relation to the Trauma Recovery Benefit payment, and the net amount after tax had been withheld, for the period covered by the benefit.

You received the net amount (the Payment) from Company Y.

You were not required to repay any amount received from Company X in relation to your sick leave and annual leave for the periods as outlined above after receiving the Payment.

You contacted Company Y in relation to the Payment, sending several emails to Person A in which you:

•         Queried whether:

o    The payment set out in their letter only related to trauma benefit

o    It was correct that Company Y has a practice of not deducting tax from Trauma Recovery Benefits where it is paid to the employer of the employee who had suffered the trauma, but that they do deduct tax from Trauma Recovery Benefit's where the employer instructs Company Y to pay the amount directly to the employee.

o    Was there a separate payment relating to income protection which commenced from the date you stopped work and met the 90 days waiting period, and if so that would be taxable income; and

•         Indicating that it was your understanding of the TRB that tax was not payable on it due to it not being related to income earned, referring to Taxation Determination TD 95/41, seeking clarification on that issue.

Person A sent you an email in which they:

•         Advised that the Trauma Recovery Benefit is under the GSC Plan and is classed as a monthly benefit as they do not pay this as a one-off lump sum, but on a monthly basis and that they did not believe that Company Y could waive the tax amount, noting that it had been paid to the ATO, however they would make enquires on that issue.

•         Confirming that:

o   The Trauma Recovery Benefit started on the date of diagnosis for 6 months and if you were disabled as defined by the Policy, the income protection benefits continue and are paid monthly in arears under the same policy

o   It was correct that if they were to pay the Trauma Recovery Benefit to the employer they would not deduct the tax, the expectation was that the employer would deduct tax as according to their tax obligations; and

o   When they are paying the insured member direct, their policy was that they would deduct tax from the benefits paid under the GSC policy; and

After a short period, Person B from Company Y sent you an email in which they outlined the following:

•         Company Y's position is that the Trauma Recovery Benefit is taxable. That position had been determined by their Internal Taxation Team following consultation with their external tax advisors and as such they could not waive their tax obligations for this benefit

•         Whilst the Trauma Recovery Benefit is payable whether someone is unable to work it remains that the payment is made from an Income Protection Policy and is considered taxable income by the ATO; and

•         They were not aware of any instances where a tax refund on the Trauma Recovery Benefit amount due to the ATO determining it was a tax-free payment.

Around the same time, Person C from the Broker's firm sent you an email in which the indicated that their firm was the broker who looked after the Policy, indicating that:

•         They were in agreeance with Company Y's response that the trauma benefit was taxable; and

•         Income protection is an income replacement insurance product which is subject to Pay As You Go (PAYG) as it is viewed as an income stream. While the trauma benefit is a lump sum payment, the purpose of the trauma benefit is to allow claimable access to the benefit period, being the payments period, during the waiting period, being the non-payment period, because they have experienced a trauma event. The trade off on having early access to the benefit period, during the waiting period, meant that your overall benefit period was reduced. Therefore, this is why the trauma benefit is taxable because you were accessing your monthly benefit payments early (in the lump sum form), with all monthly benefit payments being viewed as an income stream subject to PAYG.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 15-2

Reasons for decision

Assessable income

A payment or other benefit received by a taxpayer is included in assessable income if it is:

•         Income in the ordinary sense of the word, being ordinary income, or

•         An amount or benefit that through the operation of the provisions of the tax law is included in assessable income, being statutory income.

Taxation Ruling IT 2424 Income tax: compensation payments in respect of lawful acts of discrimination states the following at paragraph 8:

By way of general comment the determination of the character of a compensation payment, and in particular whether it is liable to tax in the hands of an employee, depends upon the nature of the payment. A compensation payment to make up for lost earnings or in substitution for income which would otherwise have been earned is in the nature of income and is liable to income tax in the hands of the employee. On the other hand a payment to compensate for personal injury, injury to feelings, humiliation, embarrassment, depression, anxiety, etc. is not liable to income tax. It is a payment of a capital nature.

Ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of Australian residents includes the ordinary income derived directly or indirectly from all sources.

Ordinary income includes income from rendering personal services, income from property and income from carrying on a business.

Section 6-5 of the ITAA 1997 includes income according to ordinary concepts (ordinary income) in assessable income. Income according to ordinary concepts refers to an accepted usage of the word 'income' and income that Courts have determined is ordinary income.

Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements provides the following in relation to payments made to an employee by associates of the employer:

84. Amounts paid to an employee under an ineffective SSA by someone associated with the employee's common law employer are payments of salary or wages. It is our view that an employer includes a person who pays salary or wages to an employee for services rendered to his or her common law employer under his or her employment contract, regardless of whether or not the person making the payment is the common law employer. Section 12-35 of Schedule 1 to the TAA requires that an entity withhold an amount from salary, wages, commissions, bonuses or allowances that it pays to an individual as an employee (whether of that or another entity).

85. The decision of Merkel J in Dean & Anor v. FC of T 97 ATC 4762; (1997) 37 ATR 52 supports this view. His Honour found that the employee retention payments made by a company associated with the common law employer were 'salary or wages' and agreed with comments by Hill J in Newcastle Club Ltd v. FC of T 94 ATC 4594 at 4595; (1994) 29 ATR 216 at 218-9 that the definition of salary or wages clearly contemplates payments from persons other than the common law employer.

Statutory income

Section 6-10 of ITAA 1997includes in assessable income amounts that are not ordinary income. These amounts are statutory income. A list of the statutory income provisions can be found in section 10-5 of ITAA 1997. That list includes a reference to 15-2 of ITAA 1997.

Under subsection 15-2(1) of the ITAA 1997, assessable income includes of a taxpayer includes the value to a taxpayer of all allowances, gratuities, compensation, benefits, bonuses, and premiums provided to the taxpayer in respect of, or for, or in relation directly or indirectly to, any employment of or services rendered.

Employment is not defined in section 15-2 of the ITAA 1997. However, Taxation Ruling TR 2023/4 outlines when an individual is an employee.for the purposes of Pay As You Go withholding, or is an independent contractor.

Personal earnings from the performance of services, whether as an employee or otherwise, are clearly income even if the services are performed, and the rewards received irregularly.

The derivation of remuneration for services was considered in Blank v FC of T [2016] HCA 42 (Blank case) which involved the question of whether a lump sum amount was part of the consideration for the services rendered in the office or employment. The case related to determining the characterisation of a taxpayer's entitlements under an employee profit participation plan (PPP) that were payable after his employment was terminated was key to settling the question of when the payments were derived.

The High Court in the Blank case took the view, noting that the fact that the 'payments' were paid after the termination of the contract of service, by an entity other than his employer, and separately to ordinary wages, did not detract from its characterisation as income as the payments were 'a recognised incident of his employment'.

Provided payments are made in respect of any employment or services rendered, it is immaterial whether they come from the employer of the recipient or from some third party (FC of T v Dixon (1953) 86 CLR 540).

Insurance provided by employers for their employees

There are two types of cases to be considered in relation to amounts received under employment related insurance:

1.            Where the employer insures employees and, in the case of companies, this includes its employees and/or directors; and

2.            Where an employed or self-employed person takes out a policy of insurance to protect himself or herself against loss of earnings or loss of ability to earn during a period of disability

Where an employer insures employees, including in the case of a company, its directors/employees, it seems that any amounts received by the employer would, apart from some exceptional kind of case, be assessable as an income receipt.

For the principles which apply to determine whether insurance receipts constitute ordinary income, see FC of T v Smith 81 ATC 4144, and Carapark Holdings Ltd v FC of T (1967) 14 ATD 402 (Carapark case). In particular, the assessability of insurance proceeds depends on the purpose of the insurance and on whether the amounts received took the place of benefits on revenue account if the insured event had not occurred.

In the Carapark case, the Full High Court stated that, in general, insurance moneys are to be considered as received on revenue account where the purpose of the insurance was to fill the place of a revenue receipt which the event insured against has prevented from arising, or of any outgoing which has been incurred on revenue account in consequence of the event insured against, whether as a legal liability or as a gratuitous payment actuated only by considerations of morality or expediency.

A revenue purpose exists where there is a nexus between the amount of the insurance benefit and the expected quantum of lost profits.

The proceeds of these policies will not be assessable as income if the purpose of the insurance is to guard against a capital loss. This would apply where, for example, insurance is taken out by a company in respect of a director for the purpose of providing, in the event of the director's death by accident, funds for the payment to the estate of a debt owing to the director.

Taxation Determination TD 95/42 Income tax: can a premium paid by an employer on a trauma insurance policy in respect of an employee be an allowable deduction to the employer? outlines that where a trauma policy is:

a) owned by an employer

b) the employer is the beneficiary of the policy

c) the premium is paid for a revenue purpose; and

d) the purpose of the policy is to advance the business ends of the taxpayer;

then the premium is deductible under section 8-1 of the ITAA 1997. Where compensation is received in these circumstances, the lump sum would constitute assessable income to the employer under section 6-5 of the ITAA 1997.

TD 95/42 provides that where any benefit expected or obtained by the employer from the insurance policy was to cover the loss of profit, either due to a reflection of reduced income or increased expenditure, resulting from the loss of the employee, a revenue purpose may exist.

The comments made in these instances recognise that employers may take out insurance products to fund their employer obligations. The employers are the beneficiaries of these policies and the application of these funds by employers is a separate matter.

While TD 95/42 outlines that an employer maybe entitled to a deduction as outlined above, that is not the case of an insurance premium paid by a self-employed person or an employee on a trauma insurance policy that provides a capital amount on the suffering of a specified medical condition is not deductible for the person who paid the insurance premium as outlined in Taxation Determination TD 95/41 Income tax: is a premium payable on a trauma insurance policy by a self-employed person or an employee an allowable deduction to the self-employed person or employee?

TD 95/41 outlines that a deduction is not allowable for the cost of the premium payable under a trauma insurance policy for the employee or self-employed person who is the owner of the policy because the purpose of the trauma insurance is to provide a capital amount to the insured if they suffer a specified medical condition. The policy does not replace earnings lost by the insured person. Therefore, the benefits payable under this type of policy do not constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997.

Application to your situation

You were diagnosed with a medical condition that was one of the eligible health issues that was covered under the Trauma Recovery Benefits (TRBs) provided under the Policy.

The Policy is a contractual agreement between Company X and Company Y of which Company X is the owner and beneficiary, and you are an insured member.

It is stated that your understanding of the Policy is that:

•         Your employer took out the insurance, including the TRB, as something they could take out on behalf of employees that could help them continue to receive some form of income if they were to become seriously ill. That would apply to the salary continuance element of the policy.

•         In relation to the TRB:

o   It was intended to be in addition to normal salary entitlements

o   You are not sure of the reason for why your employer had taken out the additional cover under the income protection policy in the form of TRB, but that the reason could be that it reflected the seriousness of certain types of illnesses/

o   It would only be payable in very defined circumstances of a diagnosis of one of the listed illnesses so was not meant to be an income replacement tool as such given it might not apply in all instances when an employee was not able to work because of serious illness or injury

o   You don't see why because a company owns the policy which pays a trauma benefit to one of its seriously ill employees that this should change it from a payment which is capital in nature which is the situation when the employee owns the policy, to being an income stream if the company owns the policy; and

•         You think that Company X having the insurance was part of an offering it had as an employer to differentiate themselves in the marketplace when competing for talent.

Based on the information provided, it appears that Company X held the Policy for its employees to put it in the position to do exactly the kind of thing which it did, namely, to extend an appropriate degree of generous treatment to their employees in addition to their normal payments for their sick leave and other remuneration obligations when it was expected that an employee who experienced any of the health issues listed under the TRB in the Policy would be unable to work.

Additionally, as stated above the Policy was offered to the employees of Company X to encourage staff to become employees by differentiating itself from other potential employers.

Looking at the Policy in lobo, it provides that other types of payments may be made under the Policy to Company X in relation to their insured members, which may also be used by them to fund their obligations to their employees, which could also be viewed as remuneration for its employees.

We also note that the Policy is also designed for complying superannuation funds that are only entitled to provide retirement benefits (even if complying superannuation funds cannot choose the trauma recovery benefit option).

That is the equivalent to remuneration for an employer.

Your employment agreement refers to the income protection provided by your employer. While the specific insurance policy with XXXX was not included in your employment agreement, there remained an obligation on your employer to have a similar type of insurance policy to fund payments to insured members should they become sick.

The facts of your situation are distinguishable from the situation considered in TD 95/41 because:

•         You as an employee or subcontractor, did not own the Policy; and

•         XXXX is the owner and beneficiary of the Policy.

Therefore, the principles about the nature of treatment of payments as outlined in TR 95/41 will not apply to your situation.

Company Y had contacted Company X in relation to the Payment being paid to them or paid directly to you, with Company X directing the Payment to be made to you.

The Payment was received by you solely because of your employment with Company X. You would not have received the Payment without that factor being in existence even if you had experienced the same medical condition.

The Payment was paid directly to you by Company Y, and not paid to Company X. However, as outlined above the fact that the Payment was made by an associate of Company X, being Company Y, will not change the nature of the Payment in your hands.

Therefore, even if the Payment was viewed as being capital in nature there is nothing to prevent it from being assessable under section 15-2 of the ITAA 1997 as it was received solely because you were an employee of Company X and the nexus to your employment in relation to the Payment exists.

Based on the information provided with this ruling, we are in agreeance with opinions expressed by the representatives from Company Y and the Broker in relation to the taxation treatment of the Payment.

Therefore, the Payment is assessable as ordinary income under section 6-5 of the ITAA 1997.

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