Edited version of private advice

Authorisation Number: 1013029288392

Date of advice: 06 June 2016

Ruling

Subject: Assessability of lump sum payment

Question and answer

Is the total lump sum amount you receive in full and final settlement of your claim under an income protection policy assessable income?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2016

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

You have been receiving monthly payments under an income protection policy.

You have been declaring these monthly payments in your income tax return.

The insurance company has offered you a lump sum payment in full and final settlement of your claim of $XXX,XXX.XX.

Relevant legislative provisions

Income tax Assessment Act 1997 section 6-5.

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.

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.

Other characteristics of income that have evolved from case law include receipts that:

• Are earned;
• Are expected;
• Are relied upon; and
• Have an element of periodicity, recurrence or regularity.

Payments of salary and 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 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC 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).

As such, the monthly income protection payments you have been receiving were income according to ordinary concepts and had been declared as such in your income tax returns.

You have been offered a lump sum payment of $XX,XXX.XX in full and final settlement of your claim under the policy.

The issue of whether the commutation of an entitlement to periodic payments to a lump sum affects assessability was considered in Coward v. FC of T 99 ATC 2166; (1999) 41 ATR 1138. In that case Mathews J found that payments made to replace income take on the character of the payment they replace and that the method of payment does not alter the character of the payment. Mathews J held that as the weekly compensation payments made to the appellant until he turned 65 were paid for loss of earnings and thus constituted income, a lump sum representing a commutation of those future weekly payments was also income.

As discussed above, the fact that you will receive a lump sum payment, in full and final settlement of your claim under your income protection policy does not alter the character of the payment as income.

Income is assessable for income tax purposes, under subsection 6-5(4) of theITAA 1997, when the person is taken to have derived it. The term derived is explained in the subsection to mean that the amount is derived when it is received or applied or dealt with in any way at the person's direction.

In your case the lump sum payment of $XXX,XXX offered to you by the insurance company will be assessable income under section 6-5(4) of the ITAA 1997 as it is replacing the monthly payments which were income under section 6-5(4) of the ITAA 1997. The lump sum payment must be included in your tax return in the year you derive the payment.