Edited version of your private ruling

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Ruling

Subject: journey accident cover

Question

Are the payments you received from a journey accident cover insurance policy included in your assessable income?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling,

· the documents provided with the application for private ruling, and

· the documents provided in response to the request for further information.

You were involved in two car accidents on your way to work that were not your fault. You have only made a claim in regards to the second accident.

As a result of your claim, you have been receiving payments from a journey accident cover insurance policy that free as part of your membership with a union.

You are covered for up to a certain amount per week, depending on your weekly earnings, for a finite period while you are off work.

You have received five payments under the insurance policy.

The payments are calculated using your average weekly income and the insurance company has not withheld any tax from your payments.

The payments do not cover any medical expenses.

You will receive payments up until your sick certificate expires. However, further amounts may be received if your doctor does not deem you fit to work.

You have requested that the payments received under the insurance policy be exempt from taxation based on your personal circumstances.

You have stated that the payments have been paid to you for the physical and emotional injuries that resulted from the car accident.

Your contract with your employer has ceased. Your employer would not give you a permanent position due to the fact that you had not been at work enough since the car accident.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5.

Reasons for decision

Summary

The journey accident cover payments effectively replace your income from salary and wages. Therefore, the payments received by you 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.

A periodical 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 periodically, are recurring and regular. These benefits paid under a policy of insurance effectively replace a taxpayer's income from salary and wages.

Amounts that are received in respect of personal injuries which are not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature.

In your case, your membership with a union provides journey accident cover when you are travelling to and from work. You were involved in a car accident while travelling to work and could no longer attend your employment. As a result, the insurance company paid regular amounts to you based on your average weekly income. The amounts were payable for a finite period while you were off work and did not cover any of your medical expenses. The payments you received were not in respect of personal injuries, but instead were in effect a replacement of your wages. Therefore, the payments you received are assessable income under section 6-5 of the ITAA 1997.