Edited version of your private ruling

Authorisation Number: 1012534038312

Ruling

Subject: insurance lump sum payment

Question and answer:

Is a lump sum payment you received in relation to a temporary salary continuance benefit in your superannuation fund assessable as ordinary income?

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You sustained an injury at work.

Initially you continued to work and receive treatment for your injury but this was followed by time off work and then a graduated return to work.

With your medical problems continuing, you settled your worker's compensation claim with your employer and ceased work.

You submitted a claim to your superannuation fund for a disability benefit. The fund had a temporary salary continuance (TSC) benefit. This entitled you to periodic (monthly) benefits payable after a set waiting period. There was a maximum period for which benefits could be paid.

You and the fund's insurer disagreed about an aspect of your claim and you took the matter to a tribunal for review.

Subsequent to the matter going to the tribunal, the insurer sought further details of your medical condition before accepting your claim. You were paid the full entitlement of monthly benefits you would have received had your claim been accepted at the time it was first made. As the period of entitlement had passed, the benefits were paid as a lump sum.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 6-5.

Reasons for decision

Summary

It is considered that the payment received constitutes assessable income, being a lump sum in arrears of your entitlement to monthly benefits intended to replace income lost through an inability to work due to illness or injury.

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts.

Whether or not a payment received in relation to an injury constitutes 'income according to ordinary concepts' depends on the full circumstances of the payment.

Typically an assessable benefit would be received as a periodic payment of benefits, paid without dispute, for example, as part of a contractual obligation on the part of the insurer for a sickness and accident policy.

Conversely a lump sum payment made as a result of a contested legal claim, for example, a negligence claim that resulted in injury of the complainant, may not be 'income according to ordinary concepts'.

However, the mode of payment (lump sum or periodic) or the circumstances of the payment (contractual entitlements under a policy or legal settlement) do not of themselves determine the character of the payment. It is what the payment is intended to cover that determines whether or not it is assessable.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82).

Thus if a person receives a pre-determined benefit that is only intended to replace income lost as a consequence of sickness or accident, that payment would typically be assessable income. Although such assessable benefits are normally received as periodic payments made for some or all of a period a person is unable to work, these can also be received as a lump sum, for example, as a payment of periodic payments in advance or in arrears.

The above can be contrasted with a payment that takes into account all the consequences of sickness or injury: loss of capacity to derive income, medical costs and other damages. Such a payment is typically paid as an undissected lump sum after some form of legal dispute that allows the damages to be quantified and the extent of liability determined. Payments paid in these circumstances would generally not be assessable.

In your case the benefit was paid to you under an entitlement you had as part of your superannuation policy. The benefit paid to you is described as a 'Temporary Salary Continuance' benefit. The salary continuance payments at issue were designed to replace income lost during a period when an employee is unable to work. The payment was for a predetermined amount, a replacement of income that would otherwise have been earned if you had not been disabled by illness or injury.

This interpretation of the benefit accords with the discussion of salary continuance benefits considered in Taxation Determination TD 1999/36. Paragraph 2 and 3 of TD 1999/36 state:

2. Salary continuance benefits are insured benefits payable in the event of the temporary disablement of an employee or self-employed person who is a member of the superannuation fund. The benefits are designed to be paid, in full or in part, during prolonged absence from employment or income producing activities because of temporary disability, to:

· replace the salary of an employee;

· provide a minimum level of income to a self-employed person; or

· compensate the policyholder for the salary paid to the employee.

3. The insurance is usually taken out by an employer, a self-employed individual or the trustee of a superannuation fund. Sometimes the benefit is self-insured. The insurance is to cover events which are in the nature of temporary disablement and prevent the member from undertaking income producing activities. The benefit is usually paid periodically while the disablement continues.

Although the payment was received as a lump sum, it is considered to have been received as an arrears payment of a past entitlement to periodic benefits.

In addition to being paid as a lump sum, the payment in your case was also made subsequent to a hearing of a tribunal. However, the fact that there may have been some disputation in relation to your claim is not considered, in itself, to determine the character of the subsequent payment.

The insurer's letter to you states that the decision to pay you a temporary salary continuance benefit resulted from a review of the recent information you provided in concurrence with all previous evidence held on your file.

The payments do not appear to have been a compromised liability that has been settled upon to resolve any disputation. That is, the payment is the same entitlement you would have received at the time of you ceasing work had the claim at that point. The payment was for the monthly benefits for a period which at the time of payment had since passed.

Given the payment was for your full entitlement under the policy, no more and no less, it is considered that the character of the payment remains the same as if it had been paid when initially requested.

Conclusion

Although the payment was paid as a lump sum and involved the intervention of the Superannuation Complaints Tribunal, in the end it represented a payment of lost income that you were entitled to receive under the salary continuance benefit of your superannuation fund. As such it is considered to take on the character of the lost income and form part of your assessable income in the year it was received, that is, the year ended 30 June 20XX.