Edited version of your private ruling

Authorisation Number: 1012439764597

Ruling

Subject: Are sickness benefits assessable income

Question 1

Is the benefit received assessable income?

Answer

No.

Question 2

Are you entitled to a deduction for your membership fees?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts

The arrangement that is the subject of the 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 and

§ a copy of the Constitution for entity A.

You are a member of entity A.

Entity A is a membership based organisation that receives its income from membership fees and investments.

One of the benefits of membership is the payment of a sickness benefit to suitably ill members. The sickness benefit has a maximum limit over a twelve month period.

You pay an annual membership fee to entity A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 8-1

Reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

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

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.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443;10 ATD 82 (Dixon's case)). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).

Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. Regard must be given to the full circumstances in which the payment is received.

In this case, the benefit is not earned as it does not relate to services performed. The payment is also a one-off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from a relationship to personal services performed. The payment is made because of membership of the entity and the benefit was paid for financial assistance following an illness rather than the actual loss or replacement of income. There is no right or entitlement to receive a payment and the amount paid does not relate to a member's wage. It is considered that a sickness benefit is not assessable as ordinary income under section 6-5 of the ITAA 1997. There are no other provisions that make the benefit assessable.

Allowable deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Therefore, for expenses to be deductible, they must have a relevant connection to the production of assessable income.

You incurred expenses for the annual membership fees for entity A. The benefit received is not assessable income, so your membership expenses do not have a relevant connection to the production of your assessable income. Therefore no deduction is allowed under section 8-1 of the ITAA 1997.