Edited version of private ruling

Authorisation Number: 1011886359645

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Ruling

Subject: Salary continuation benefits

Question

Is the lump sum salary continuance payment assessable income?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The deceased passed away in June 20XX.

The deceased was previously forced to resign from her employment due to ill health.

The deceased did not receive her entitlements under a salary continuation insurance policy.

In December 20XX a lump sum payment was paid to the estate for the salary continuation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1936 Subsection 101A(1)
Income Tax Assessment Act 1936 Subsection 159ZRA(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 ordinary income derived directly or indirectly from all sources during the income year.

Salary and wages are regarded as ordinary income.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

Payments under a salary continuance policy are paid to substitute salary and wages and are regarded as assessable income.

A lump sum payment takes on the character of the payment it replaces (Coward v. FC of T 99 ATC 2166; (1999) 41 ATR 1138).

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.

The lump sum payment from the salary continuation policy was for salary replacement during the period of illness. The payment is regarded as ordinary income and is therefore fully assessable under subsection 6-5(2) of the ITAA 1997.  

Although some of the payment accrued in earlier years, the lump sum is assessable income in the year of receipt.

Where the trustee of a deceased estate receives an amount which would have been included in the assessable income of the deceased, had they received it during their lifetime, then that amount will be included in the assessable income of the deceased estate. That income will be deemed to be income to which no beneficiary is presently entitled (subsection 101A(1) of the Income Tax Assessment Act 1936).

Therefore, as the deceased would have been assessable on the salary continuance payment if they had received it in their lifetime, the trustee of the deceased estate is required to include this lump sum payment in the assessable income of the estate in the year which the amount was received.