Edited version of private advice

Authorisation Number: 1052197078029

Date of advice: 8 December 2023

Ruling

Subject: Income - trauma recovery benefit payments

Question:

Are the Trauma Recovery Benefit payments assessable to you under either section 6-5 or section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You commenced working as an employee of Company X with the letter of confirmation of your employment including the following information:

Remuneration:

•         Your salary commenced at a specified amount (exclusive of superannuation)

•         Company X will make superannuation contributions at the statutory rate on your behalf to a superannuation fund nominated by you

•         Company X also operates a number of non-cash and other benefits, including, but not limited to, an annual bonus scheme, non-contributory life insurance and income protection insurance; and

•         Salaries are reviewed annually, at which time Company X, in its absolute discretion, increase your salary.

Personal leave

•         You will accrue an entitlement to paid personal leave at the rate of a specified number of days for each continuous year of service. You must produce a doctor's certificate if you are absent for more than a specified number of consecutive days; and

•         You will not be entitled to payment in lieu of unused sick leave at the time of termination of your employment.

Company X is the owner of the Group Salary Continuance Insurance Policy (the Policy), insured with Company A.

The Policy was transferred from Company B when it had integrated with the group in which Company A was a member, with the insurance cover under the Policy continuing with Company A.

Company X doesn't have any specific written sick leave policy (beyond that stated above) with their employees having access to personal leave as per statutory requirements. If employees are sick or injured beyond their statutory entitlements, the Policy may respond in circumstances where the employee's sickness of injury results in them being unable to work beyond the waiting period.

The Product Disclosure Statement for the Policy includes the following information:

•         The insurance can be a great way to add value to employees' remuneration packages or offer competitive insurance through a superannuation fund. Cover is provided through a group policy, which means one contract - owned by an employer or superannuation fund trustee - providing cover for a group of employees or members of a complying superannuation fund.

•         The insurance provides a monthly benefit of up to 75% of salary for an insured member who is unable to work due to illness or injury. The flexible nature of the insurance allows it to be tailored to provide insurance cover for the group by choosing the most appropriate benefit design

•         There are numerous built-in benefits and features of the Policy listed, including a Continuation Option which allows an insured member to apply for an individual policy on favourable terms if they cease to satisfy the eligibility criteria

•         There are numerous optional benefits of the Policy listed, including Trauma Recovery Benefit; and

•         Defines 'insured member' as referring to 'a person who is covered by the policy and is either an employee or contractor of an employer or partner in a partnership where the policy is employer owned, or a member of a complying superannuation fund where the policy is owned by the trustee of a complying superannuation fund'.

You are an insured member of the Policy.

Company X made representations to its employees that they provide Group Salary Continuance Insurance benefits, from time to time, as part of working for them as an employer (whether or not contained in a contract of employment or formal sick leave policy).

You had been extremely ill in relation to another unrelated health issue when you were diagnosed with your medical condition which required you to have surgery and other treatment, which is ongoing.

You were diagnosed with one of the medical conditions covered by the Policy, requiring treatment that was completed during the following year after your diagnosis.

You did not receive any insurance payments under the Policy as you continued to work during the treatment for your medical condition, receiving your normal salary during that time until you ceased employment with Company X, with no period of leave without pay or on reduced pay, continuing to receive your ordinary salary and wages.

You were not aware of the eligibility for a claim to be made under the Policy, with the servicing advisor of Company A not being made aware of your medical condition at the time you were diagnosed, so could not make it known about the eligibility for Company X to make the claim.

The servicing advisor was made aware of your medical diagnosis and eligibility for a claim to be made, and a retrospective Trauma Recovery Benefit claim was lodged with Company A under the Policy a significant period after your treatment for your medical condition had ended.

You resigned from your employment with Company X shortly after the claim was lodged.

During the following month Company A sent a letter to Company X in relation to your Group-Salary Continuance claim advising:

•         That they had completed their assessment and your claim had been accepted as your diagnosis had met a listed trauma recovery event and that you were entitled to a specified number of months benefit payable over a specified period.

•         The monthly payment amounts (collectively referred to as the Insurance Payments) for the relevant monthly periods and the total benefits paid was provided; and

•         The transfer of the monthly payments had occurred on one date (Date 1).

Company A indicated that they planned to withhold Pay As You Go withholding (PAGYW) tax from the Insurance Payments if the payments were made directly to the lives insured despite it being raised with them that the lump sum payments were non-assessable income.

Company X, as the Policy owner, had requested the Insurance Payments in relation to the claim be paid directly to them by Company A, to be remitted in full as non-assessable income to you as against Company X pending a favourable ruling decision that the Insurance Payments were not assessable income and were exempt under the capital gains tax provisions.

Company A paid the total amount of the Insurance Payments to Company X on Date 1, with no tax withheld.

You sent an email to the Chief Financial Officer of Company X requesting the Insurance Payments that Company X had received in relation to your claim be paid in the following fortnight's payroll run. You received an emailed response indicating that Company X would pay it, but that they would need to withhold tax until the ruling decision was received.

Company X paid a Trauma Recovery Benefit payment amount into your bank account, being a portion of the Insurance Payments.

The remaining portion of the Insurance Payments are being held by Company X, which will be accounted for by them in accordance with the ruling decision.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 15-2

Reasons for decision

Assessable income

A payment or other benefit received by a taxpayer is included in assessable income if it is:

•         Income in the ordinary sense of the word, being ordinary income, or

•         an amount or benefit that through the operation of the provisions of the tax law is included in assessable income, being statutory income.

Ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of Australian residents includes the ordinary income derived directly or indirectly from all sources.

Ordinary income includes income from rendering personal services, income from property and income from carrying on a business.

Section 6-5 of the ITAA 1997 includes income according to ordinary concepts (ordinary income) in assessable income. Income according to ordinary concepts refers to an accepted usage of the word 'income' and income that Courts have determined is ordinary income.

Statutory income

Section 6-10 of ITAA 1997 includes in assessable income amounts that are not ordinary income. These amounts are statutory income. A list of the statutory income provisions can be found in section 10-5 of ITAA 1997. That list includes a reference to 15-2 of ITAA 1997.

Under subsection 15-2(1) of the ITAA 1997, assessable income includes of a taxpayer includes the value to a taxpayer of all allowances, gratuities, compensation, benefits, bonuses, and premiums provided to the taxpayer in respect of, or for, or in relation directly or indirectly to, any employment of or services rendered.

Insurance provided by employer for their employees

Where an employer insures employees, including in the case of a company, its directors/employees, it seems that any amounts received by the employer would, apart from some exceptional kind of case, be assessable as an income receipt.

The question whether payments of compensation under personal sickness and accident, or other disability policies, and payments of workers ' compensation are assessable has been considered by the courts and tribunals (previously Boards of Review) in a number of cases.

For the principles which apply to determine whether insurance receipts constitute ordinary income, see FC of T v Smith 81 ATC 4144, and Carapark Holdings Ltd v FC of T (1967) 14 ATD 402 (Carapark case). In particular, the assessability of insurance proceeds depends on the purpose of the insurance and on whether the amounts received took the place of benefits on revenue account if the insured event had not occurred.

In the Carapark case, the Full High Court stated that, in general, insurance moneys are to be considered as received on revenue account where the purpose of the insurance was to fill the place of a revenue receipt which the event insured against has prevented from arising, or of any outgoing which has been incurred on revenue account in consequence of the event insured against, whether as a legal liability or as a gratuitous payment actuated only by considerations of morality or expediency.

Taxation Determination TD 95/42 Income tax: can a premium paid by an employer on a trauma insurance policy in respect of an employee be an allowable deduction to the employer? outlines that

where a trauma policy is:

a) owned by an employer

b) the employer is the beneficiary of the policy

c) the premium is paid for a revenue purpose; and

d) the purpose of the policy is to advance the business ends of the taxpayer;

then the premium is deductible under section 8-1 of the ITAA 1997. Where compensation is received in these circumstances, the lump sum would constitute assessable income to the employer under section 6-5 of the ITAA 1997.

TD 95/42 provides that where any benefit expected or obtained by the employer from the insurance policy was to cover the loss of profit, either due to a reflection of reduced income or increased expenditure, resulting from the loss of the employee, a revenue purpose may exist.

The comments made in these instances recognise that employers may take out insurance products to fund their employer obligations. The employers are the beneficiaries of these policies and the application of these funds by employers is a separate matter.

Application to your situation

The Policy is a contractual agreement between Company X and Company A. Company X is the owner and beneficiary of the Policy, with you being an insured member.

The policy agreement between Company X and Company A enabled Company X to make claims if their employees suffered from any of the eligible health issues.

It is stated:

•         That the purpose of Company X taking out the Policy is for it to be an aid for it to cover remuneration obligations in relation to their staff when they are unable to work due to illness, with the Insurance Payments in relation to the Policy discharging Company X's obligation in relation to its representations made to its employees to provide such insurance, from time to time, as part of working for Company X; and

•         You and Company X viewed the Policy as being part of your remuneration.

Based on the information provided, a motivating consideration on the part of Company X was that if any of the events insured against in the Policy to be eligible for the Trauma Recovery Benefit payment occurred, the receipt of the Policy moneys would place Company X in a position to do exactly the kind of thing which it did, namely, to extend an appropriate degree of generous treatment to their employees by funding its sick leave obligations when it was expected that an employee who experienced any of the health issues included in the Policy would be unable to work.

Looking at the Policy in Globo, it provides that other types of payments may be made under the Policy to Company X in relation to their insured members, which may also be used by them to fund their obligations to their employees, which could also be viewed as remuneration for its employees.

We also note that the Policy is also designed for complying superannuation funds that are only entitled to provide retirement benefits (even if complying superannuation funds cannot choose the trauma recovery benefit option). That is the equivalent to remuneration for an employer.

You were diagnosed with a medical condition while you were employed by Company X, being one of the eligible health issues that enabled Company X to make a claim under the Policy.

Company A made the Insurance Payments in relation to the Policy to Company X as policy owner.

Company X then made a Trauma Benefit Recovery payment to you as required by your Employment Agreement, using the amounts they received in relation to the Policy to fund their remuneration obligations to you.

You are not receiving any Insurance Payments from Company A. You did not have a contractual agreement with Company A. You had a contractual agreement with Company X, being your Employment Contract. You did not have a trustee and beneficiary relationship with Company X. You are receiving the Trauma Benefit Recovery payments from Company X as sick leave payments in relation to your employment.

While you have ceased your employment with Company X, the claim was made while you were still an employee in relation to a period during your employment with Company X. Therefore, any Trauma Recovery Benefit payments you receive directly relate to your employment with Company X and you would not have received the payments other than for that reason.

It is viewed that the nature of the payments in your hands is revenue, being amounts received to replace your sick leave entitlements. Therefore, the Trauma Recovery Benefit payments will be assessable under either section 6-5 or 15-2 of the ITAA 1997.