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Ruling

Subject: mortgage protection insurance

Question

Are disability benefits paid directly to your mortgage under the terms of a mortgage disability insurance policy assessable income?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You hold a mortgage disability insurance policy with an insurance company.

The policy relates to a residential property.

The property is secured on an interest only loan in the joint names of you and your spouse.

During the 2010-11 financial year you went on sick leave from your employment as you were suffering from a medical condition.

You have not returned to work since this time.

You made a claim with your insurance company and they have been paying mortgage payments each month for your property.

You are still in receipt of income from your employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5.

Reasons for decision

Summary

The payments applied to your mortgage by the insurance company are intended to replace your income from salary and wages and are regular and relied upon. The amounts applied to your mortgage under the insurance policy are assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Subsection 6-5(2) of the 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.

Based on case law, it can be said that ordinary income generally includes receipts that are earned, expected, relied upon and have an element of periodicity, recurrence or regularity. Payments of salary and wages for example, are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

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.

ATO ID 2004/662 discusses the assessability of disability benefits, paid under the terms of a mortgage protection policy. A monthly benefit paid under an insurance policy is intended to provide financial support and assistance for the person insured. While not earned, such payments are expected and relied upon by the insured, and being paid monthly, are recurring and regular. These benefits paid under a policy of insurance are intended to replace a taxpayer's income from salary and wages.

Taxation Ruling TR 98/1 provides that under the receipts method, income is derived when it is received either actually or constructively under subsection 6-5(4) of the ITAA 1997.

Subsection 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it is derived, a taxpayer is taken to have received the amount when it is applied or dealt with in any way on their behalf or as directed by them. An amount is treated as having been received as soon as the taxpayer gets a benefit from it.

In your case, you purchased an insurance policy to cover your mortgage payments in the event of being unable to work. When you became unfit for your work duties, your insurance company paid amounts directly to your mortgage as disability benefits. These benefits are regular, relied upon and were derived by you when they were applied to your home loan account. Even though you are still in receipt of income from your employer, the monthly payments from the insurance policy were designed to replace your income from salary and wages. Therefore, the payments applied to your mortgage under the insurance policy are assessable income under section 6-5 of the ITAA 1997.