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Edited version of your written advice
Authorisation Number: 1012997443624
Date of advice: 14 April 2016
Ruling
Subject: Assessable income
Question 1
Are the payments received under your insurance policy assessable income?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You became ill and were unable to work.
You made a disability income claim through your insurance policy and were paid income replacement payments.
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 (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.
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.
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 under section 6-5 of the ITAA 1997.
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 AITR 443; 10 ATD 82). Compensation payments which are paid to substitute income have been held by the courts to be income under ordinary concepts (F C of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).
In your case, as you could not work due to your illness, you received benefits under an insurance policy. The purpose of this policy was to provide you with income in the event of you being unable to work. The amount paid under the policy was earned because of your rights under the policy. It was also expected, and had an element of periodicity, recurrence or regularity.
The payments you received from the insurer were intended to replace your income. Therefore, you are assessable on the income protection policy payments under subsection 6-5(2) of the ITAA 1997.