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Edited version of your written advice
Authorisation Number: 1012724566045
Ruling
Subject: Income protection payments
Question
Are the monthly payments received under your insurance policy assessable income?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commenced on
1 July 2013
Relevant facts
You were injured in a work related accident.
You sustained many lasting injuries which resulted in your permanent disablement.
Your insurance policy was for wage and income protection.
You receive monthly income replacement payments from your insurer under the disability clause of your policy.
You have been able to access your Superannuation because of your disability.
You do not have prospects of future employment because of your disability.
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 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.
Payments of salary or wages, including payments made under an insurance policy that replaces salary or wages are income according to ordinary concepts and are included in assessable income.
The question of whether amounts paid under an insurance policy in lieu of income are assessable was considered by the High Court in F C of T v Smith, 81 ATC 4114 (Smith's case). In that case, the taxpayer was a medical practitioner employed by a hospital. He was injured in a traffic accident on 19 October 1977 and was disabled until 16 February 1978. For that period he received $2,112 under the terms of a personal disability insurance policy which he had taken out some years earlier.
It was held by the Full High Court that the amount of $2,112 was assessable. In their joint judgement Gibbs, Stephen, Mason and Wilson JJ said that, in their opinion, the conclusion was inescapable that the purpose of the policy was to diminish the adverse economic consequences of injury by accident. It was to provide a monthly indemnity against the income loss arising from the inability to earn. The revenue nature of the benefits was clearly stamped upon them during the period of four months during which the insured was totally disabled from earning.
The decision in Smith's case confirms the Commissioner's practice of including periodic benefits payable under a disability insurance policy as assessable income. It is considered that had an income protection insurance policy been the relevant policy in Smith's case the decision would have been the same.
In your case, while we accept that the payments are paid to you under the disability clause of your policy, as with Smith's case, the monthly payments are assessable.
We further acknowledge that you have been able to access your Superannuation because of your disability. However, this does not change the nature of the payments you receive under the policy.