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Ruling

Subject: Superannuation income stream payments after age 60

Question

Are the payments made to you under the income protection policy assessable income?

Advice/Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2012

Relevant facts

You were employed by your employer for a number of years.

You acquired a medical condition.

You went onto light duties as your employer would not allow you to return to your original job while on medication.

You were offered payments under an income protection policy (the Policy) which you accepted.

You will receive payments under the Policy until age 65.

You provide that premiums for the Policy are made by your employer.

Payments under the Policy are income protection payments set up when an employee is unable to perform the duties of their job. Payments under the Policy represent a percentage of your prior wages.

Payments under the Policy are made by an insurer.

You receive a PAYG summary each year from the insurer.

You currently do not work for your employer or any other employer and your sole income is from the Policy.

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 Section 301-10.

Income Tax Assessment Act 1997 Section 301-20.

Income Tax Assessment Act 1997 Section 301-25.

Income Tax Assessment Act 1997 Section 301-35.

Income Tax Assessment Act 1997 Section 301-40.

Income Tax Assessment Act 1997 Subsection 307-5(1).

Reasons for decision

Summary

Payments made under the Policy are not amounts made to you from a superannuation fund because you are a fund member. Payments under the Policy are not paid from or through a superannuation fund but are made by an insurer directly to you. In addition, it is noted that the premiums for the Policy are paid by your prior employer.

In light of the foregoing, it is considered that the payments made under the Policy are not superannuation benefits and are not taxed in the same manner as superannuation income streams.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted. In the case of payments under the Policy, the payments replace, up to a specified percentage, the salary and wages normally earned, expected and relied upon by the insured person during the period specified under the Policy.

These payments are considered to be ordinary income as they acquire the character of the salary and wages for which they are substituted.

Detailed reasoning

Superannuation Benefits

Section 307-5 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out amounts which are superannuation benefits. Generally, an amount which is paid to a person from a superannuation fund because they are a fund member is a superannuation benefit by virtue of subsection 307-5(1). The taxable component of such amounts will, subject to the persons age at the time of receipt, be included as assessable income (section 301-20, section 301-25, section 301-35 or section 301-40).

Where a person is aged 60 years or over when he or she receives a superannuation benefit (regardless of whether this benefit is received as a lump sum or income stream), section 301-10 of the ITAA 1997 provides that the benefit is not assessable income and is not exempt income.

In this case, payments under the Policy are made by an insurer. Further, you receive a PAYG summary each year from the insurer.

Payments under the Policy are not amounts made to you from a superannuation fund because you are a fund member. Payments under the Policy are not paid from or through a superannuation fund but are made by the insurer directly to you.

In addition, it is noted that the premiums for the Policy are paid by your previous employer.

In light of the foregoing, it is considered that the payments made under the Policy are not superannuation benefits as listed in subsection 307-5(1) of the ITAA 1997 as they have been made directly to you from the insurer and not from a superannuation fund. Hence, section 301-10 does not apply to treat the payments as not assessable income and not exempt income.

Ordinary Income

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.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

o are earned;

o are expected;

o are relied upon; and

o have an element of periodicity, recurrence or regularity.

Payments of salary and 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 (Federal Commissioner of Taxation v. Dixon¹). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Commissioner of Taxation v. Inkster²; Tinkler v. Commissioner of Taxation (Cth)³; AAT Case 7328⁴).

The payments provide you with income as you are unable to work due to illness. The purpose of the payments made under the Policy are to replace, up to a specified percentage, the salary and wages normally earned, expected and relied upon by you during the period specified under the Policy.

These payments are considered to be ordinary income as they acquire the character of the salary and wages for which they are substituted. The payments are assessable under subsection 6-5(2) of the ITAA 1997.