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Ruling

Subject: Assessable income - Income protection policy payments

Question

Are the payments received from the income protection insurance policy assessable income?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You suffered a sporting injury which required you to have a period of time off work.

The sporting club had taken income protection insurance out on your behalf.

Under the income protection insurance policy, you were paid a percentage of your wage for the period you were unable to work.

The payments were made during the financial year ended 30 June 2011.

You advised your employer to stop paying your wage for the period you were unable to work. However, as they did not want you to be out of pocket, they continued to pay your full wage. You gave your employer the payments made to you under the income protection insurance policy.

You have received a payment summary from the insurer which includes the amounts they paid to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(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 income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Based on case law, it can be said that ordinary income generally includes receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

Payments of salary or wages, including payments made under an insurance policy that replaces salary or wages, are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which are paid to substitute income have been held by the courts to be income under ordinary concepts (F C of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

In your case, as you could not work due to your injury, you received benefits under an income protection policy taken out by the sporting club. The purpose of this policy was to provide you with income in the event of you being unable to work. The amount paid under the policy was earned because of your rights under the policy. It was also expected, and had an element of periodicity, recurrence or regularity.

The payments you received from the insurer were intended to replace your income. Although you gave your employer the net payment that was made to you, it was you that derived the income. Therefore, you are assessable on the income protection policy payments under subsection 6-5(2) of the ITAA 1997.