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Edited version of your private ruling
Authorisation Number: 1012433593532
Ruling
Subject: Income protection insurance payment
Question
Are the payments you receive under an income protection (IP) policy assessable income?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
You are a member of an industry superannuation fund (the fund).
You are listed as an insured member under the funds group salary continuance plan.
Your funds Product Disclosure Statement describes IP cover as 'a regular income payment (indexed) if you are unable to work in your own occupation due to injury or illness'.
You were diagnosed with an illness and have been unable to return to work.
You made a claim on the policy which was accepted.
You have been in receipt of monthly income protection payments, which have been returned in your income tax returns as income.
Each month you submit a claim form completed by your medical practitioner to certify that you are unable to return to work due to your condition.
Your policy remains current.
Relevant legislative provisions
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 a taxpayer includes income according to ordinary concepts (ordinary income).
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.
Salary and wages are regarded as ordinary income.
The High Court of Australia has established in several cases that for income tax purposes, an amount paid to compensate for a loss, generally acquires the character of that for which it is substituted, and that compensation payments which substitute income are income under ordinary concepts.
Several ATO Interpretative Decisions have also discussed this issue, including:
· ATO ID 2002/175 - a taxpayer with a terminal illness was assessable on monthly payments received under an income protection policy.
· ATO ID 2004/662 - the Tax Office treated as ordinary income disability benefits paid under a mortgage protection policy because the taxpayer could not work due to sickness.
Income protection insurance replaces an individual's regular salary or earnings if they are unable to work for a period of time due to sickness or injury, by providing a regular income stream for an agreed period of time.
In your case, the monthly payments you receive are expected and relied upon by you and they are recurring and regular. Therefore, they are characterised as ordinary income and therefore are assessable income.