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Edited version of your private ruling
Authorisation Number: 1012617731810
Ruling
Subject: Income - salary continuance policy
Question 1
Is the lump sum payment you will receive to finalise your salary continuance claim, assessable as ordinary income?
Answer
Yes.
Question 2
Is the lump sum payment you will receive to finalise your salary continuance claim, included in assessable income under the capital gains provisions?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
Your former employer had a group salary continuance (income protection) policy. Policy premiums were paid by your employer.
You were an insured, or person entitled to claim, under the policy.
In the past decade you were medically assessed as suffering from a condition and you 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.
At no stage did the insurer dispute your eligibility to the payments.
The insurer offered you a commercial settlement of all your potential future entitlements under the claim and policy based on medical information they had received that it was evident that you would be unable to return to work.
You have accepted the terms of the deed of release. On signing of the deed you acknowledge that the lump sum is the full amount of monetary consideration payable under the policy and in respect of the claim and any entitlements connect with the policy will be terminated.
You have not taken any legal action against the insurer in relation to the monthly income protection payments.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Section 6-10
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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.
Income protection policies provide for periodic payments in the event of loss of income caused by the insured becoming disabled through sickness or injury. These payments are assessable as income under section 6-5 of the ITAA 1997, as they are paid to take the place of lost earnings.
In your case, you had been in receipt of monthly income protection payments and part way through the financial year the insurer has decided to payout your remaining benefit and finalise your claim.
The commutation of the monthly payments into a lump sum does not change its character of compensation for loss of income. The lump sum is a receipt of income only, that is, there is no capital component in the payment.
Therefore, the lump sum payment you will receive from the insurer is an advance of your future monthly payments and is assessable under section 6-5 of the ITAA 1997 as ordinary income in the year it is received.
The capital gains tax (CGT) provisions do not apply to the lump sum finalisation payment as it is otherwise included in your assessable income, as ordinary income.