Edited version of private advice

Authorisation Number: 1052136089486

Date of advice: 10 July 2023

Ruling

Subject: Income - compensation

Question

Are the payments received from XX XX for total and permanent disability taxable?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were injured at work.

You are unable to work in your trade.

You have a self-funded XX XX XX policy with XX XX.

The policy allows for payment if the insured is severely disabled or partially disabled.

Unless you have been unemployed for 12 consecutive months or more immediately before your disability started, we will consider you to be severely disabled if, solely due to sickness or injury:

•         you are unable to perform the important income producing duties of your usual occupation for more than 10 hours per week; and

•         you are not working for more than 10 hours per week in any gainful occupation, as long as you are following the advice of a registered doctor in relation to that sickness or injury.

You have made a claim under your income protection policy.

Your claim has been accepted as an Income Protection benefit from 20XX.

Your first payment period for total disability benefit was for the period XX XX 20XX to XX XX 20XX.

You are paid on a monthly basis. Your payments are calculated on 75% of your pre-disability income.

The payments are made to your nominated individual bank account.

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

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 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 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). (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82).

The payments you received due to an injury suffered represents monthly amounts of income that would be considered to be income received if you were still working. Even if the receipts were not directly attributable to employment or services rendered, the expected regular periodical payments have the character of ordinary income. 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 (1981) 147 CLR 578; 81 ATC 4114; 11 ATR 538).

Therefore, periodic payments received during a period of total or partial disability under an insurance policy are assessable on the same principle as salary and wages.

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 are 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 made for compensation.

In your case, the income protection policy provides you with a replacement of your income which is ordinary income and included in your assessable income under section 6-5 of the ITAA 1997 in the income year in which the payments are received.