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Edited version of your written advice
Authorisation Number: 1013117566350
Date of advice: 1 November 2016
Ruling
Subject: Salary continuance insurance payments
Question
Is the monthly salary continuance insurance benefit payment you received assessable income?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 20YY
Year ended 30 June 20ZZ
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You receive salary continuance insurance payments from your insurer.
The benefit payment is a monthly payment.
The payment will be on-going due to the nature of illness.
You did not claim premiums as deductions in your income tax returns.
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 an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has been held to include income from providing 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 or relied upon
● have an element of periodicity, recurrence or regularity
● replace income.
Taxation Determination TD1999/36 Income tax: should salary continuance benefits, paid to a member of a superannuation fund as a result of having a temporary disability, be reported for Reasonable Benefit Limits purposes provides the salary continuance benefits are designed to be paid, in full or in part, to
● Replace the salary of an employee
● Provide a minimum level of income to a self-employed person; or
● Compensate the policy holder for the salary paid to the employee
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).
Therefore periodic payments received during a period of total or partial disability under a salary continuance policy are assessable on the same principle as salary and wages. This is because the benefits are a replacement of employment income during the period of total or partial disability (FC of T v. D.P. Smith 81 ATC 4114; (1981)11 ATR 538).
In your case, you receive monthly salary continuance insurance payment from your insurer. The purpose of the payment is to replace your salary. Therefore, the monthly payment is assessable income.