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Ruling

Subject: Taxation of Insurance premium refund

Question 1

Is the refund of your premiums to be treated as taxable income?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commences on

01 July 2010

Relevant facts and circumstances

You have an income protection policy in place and you have paid yearly premiums.

Each year that you paid this premium you claimed a tax deduction for the cost.

You suffered an injury and ceased work in 2001 and you claimed workers' compensation benefits through a workers' compensation policy from that date.

In 2011 you contacted your income protection insurer to establish a claim. Your claim was accepted and you were indemnified for an initial period from early 2002 to late 2003. Your policy provides an offset clause for the periods that you are in receipt of workers' compensation payments.

You continue to receive payments for ongoing injuries.

The premium on your income protection policy was waivered from early 2002 to date and is ongoing. This is due to a clause in your policy which says when the insured person is injured and is either totally or partially disabled any premium that falls due will be waivered until the insured person ceases to be totally or partially disabled.

You have received a refund of your premiums.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 20-25

Income Tax Assessment Act 1997 subdivision 20-A

Reasons for decision

The taxation consequences of the refund of a waived insurance premium payment you receive from your income protection insurance policy falls for consideration under the recoupment provisions of the Income Tax Assessment Act 1997 (ITAA 1997)

There is no general principle which establishes that a payment made as reimbursement or recoupment of an expense previously deducted is inherently income. It is the character of the receipt, not the fact of the reimbursement that has to be considered.

Subdivision 20-A (section 20-10 to 20-65) of the ITAA 1997 applies where a taxpayer has received an amount as recoupment of a deductible loss or outgoing. Recoupment of a loss or outgoing includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, or a grant in respect of the loss or outgoing as set out in section 20-25(1) of the ITAA 1997.

The effect of Subdivision 20-A of ITAA 1997 is to include the recoupment amount in a taxpayer's assessable income to the extent the loss or outgoing has been deducted. This subdivision does not apply, however, to amounts that are ordinary income or that are included in assessable income by any other provisions.

Subsection 20-20(2) of the ITAA 1997 provides that an amount you have received as a recoupment of a loss or outgoing is an assessable recoupment if:

· you received the amount by way of insurance or indemnity, and

· you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.

The refund of the insurance premium received by you was brought about by the acceptance of the income protection insurance claim. This refund is the return of all premiums following the acceptance of the claim, and thus, is an amount received by way of indemnity.

As you have deducted an amount pursuant to section 8-1 of the ITAA 1997, for the insurance premium paid in the years when the policy was renewed, the refunded insurance premiums is an assessable recoupment under subsection 20-20(2) of the ITAA 1997 in the year that the amount is received.

The assessable recoupment provisions apply only to the extent of the amounts previously claimed as a deduction.

You are required to include the assessable recoupment of your insurance premium in your tax return.