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Edited version of your written advice
Authorisation Number: 1012824123973
Date of advice: 16 June 2015
Ruling
Subject: Assessability of lump sum payment
Question
Will the lump sum payment you receive as redemption of your income protection insurance policy form part of your assessable income?
Answer
Yes.
This ruling applies for the following periods
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commences on
1 July 2014
Relevant facts and circumstances
You were diagnosed with a medical condition and commenced receiving payments under your employer's income protection policy.
The payments replaced a percentage of your pre-illness salary and wage income.
The insurer will pay you a lump sum amount as redemption of the remaining payments under the policy.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.
An amount paid to compensate for loss generally acquires the character of that for which it is substituted. Compensation payments that substitute for income have been held by the courts to be income under ordinary concepts even when paid as a lump sum.
In your case, you receive payments under an income protection policy as a partial compensation of the salary and wages you would otherwise receive. The insurer will pay you a lump sum as redemption of your future entitlements under the policy. As salary and wages are assessable income, the payments you receive to replace them are also assessable. The fact that the insurer will pay the remainder of the payments payable under the policy as a lump sum does not alter this.
The lump sum payment of your future entitlements under the policy will form part of your assessable income in the year in which it is received.