Edited version of your written advice

Authorisation Number: 1012997612069

Date of advice: 12 April 2016

Ruling

Subject: Income protection insurance and its deductibility

Questions and Answers

Can your expenses from income protection insurance be used to reduce assessable income from investment sources?

No

Are amounts of income protection insurance payable to you as a non-resident assessable in Australia?

No

This ruling applies for the following period

Year ended 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

You are an Australian citizen

In 20XX you moved overseas

You have accordingly become a tax resident of the new location

You have a property in Australia which is generating rental income.

You have no assessable income from employment sources in Australia.

You have income protection insurance which covers you for employment income earned whilst in the new location.

Your income protection does not provide you protection from loss of rental income.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Reasons for decision

Deductibility of insurance premiums

Section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings to the extent they are incurred in gaining or producing assessable income and are not of a capital, private or domestic nature.

In applying this provision the courts have held that to be deductible the loss or outgoing must be incidental and relevant to the earning of assessable income (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236, Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; 81 ATC 4114; (1981) 11 ATR 538 (Smith's Case )).

In Smith's Case the High Court considered the deductibility of premiums paid for a personal disability insurance policy. The policy provided the taxpayer with a monthly indemnity against any income loss arising from an inability to earn.

The Court held that the premium was deductible because it was incidental and relevant to the operations and activities carried on to produce assessable income. This decision was not made by reference to the certainty or likelihood of the premium generating income but by reference to its nature and character and its general connection with the taxpayer's activities which directly produced assessable income.

As your income protection insurance covers the loss of employment income, it would therefore be deductible to the extent that it covers the loss of employment income. As your policy does not cover a loss of rental income, it has no correlation to your rental earnings and cannot be applied as a rental deduction.

Income protection payments to non-residents outside Australia

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

As the income protection insurance will be paid to provide relief from a loss of income which is otherwise not assessable in Australia,

Payments a taxpayer receives from income protection insurance are intended to provide financial support for an insured entity. Income replacement payments replace the salary and wages normally earned, expected and relied upon by you. These payments acquire the character of the salary and wages for which they are substituted. As the ordinary salary and wages of a non-resident employee working outside Australia are not assessable in Australia, consequently the income protection payments connected to that income are not assessable in Australia.