Edited version of your written advice

Authorisation Number: 1051505640361

Date of advice: 11 April 2019

Ruling

Subject: Payments from Income Protection Policy

Question

Is the payment you receive under your income protection policy assessable as ordinary income?

Answer

Yes

This ruling applies for the following period:

Period ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You were injured at work.

You have suffered a permanent loss.

You are unable to work in your trade.

You have a vital income protection policy with a Fund from 19XX

The policy allows for payment if the insured is totally disabled and can’t work -

The person is totally disabled if, because of an injury or sickness they cannot do at least one of the income producing duties of their occupation, is not working and is following the advice and is under the regular care of a medical practitioner.

You have made a claim under your income protection policy

Your claim has been accepted as a sickness claim from early 20YY

Your first payment period for total disability benefit was early 20YY to mid 20YY.

You are paid on a monthly basis.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

Reasons for decision

Question 1

Summary

The periodic payments you are entitled to receive under the policy are not a compensation payment connected with your loss of earning capacity caused by your illness. The sole purpose of the periodic payments is to substitute the income you would have otherwise earned if not for your incapacity. The payments you receive cannot be considered as a structured settlement as the payments made to you from your own policy. A structured settlement is the result of an agreement between parties to a personal injury case and a payment is being made for compensation.

Detailed reasoning

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.

An amount paid to compensate for loss generally acquires the same nature of what it is substituting. 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).

Ordinary income has 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 received as a product of any employment, services rendered, or any business;

● are earned;

● are received regularly or periodically;

● are expected; and

● are relied upon.

Income protection policies provide for periodic payments in the event of loss of income caused by the insured becoming disabled through sickness or injury. These payments are assessable as income, as they are paid to take the place of lost earnings.

Application to your circumstances

As the periodic payments you are entitled to receive under the income protection policy are paid in substitution for your loss of earnings, and not for any loss of earning capacity, the received sum is considered ordinary income as it takes on the income nature of the periodic payments it was paid to replace. Therefore, the received sums are ordinary income and is to be included in your assessable income under section 6-5 of the ITAA 1997 in the income year in which the payments are received.