Edited version of private advice

Authorisation Number: 1052410635384

Date of advice: 27 June 2025

Ruling

Subject: Assessable income - income protection payments

Question

Are the monthly payments you receive under an income protection policy included in your assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In accordance with your Company A policy(the Policy) you made a claim for Income Protection benefits (claim) under the Policy.

The Product Disclosure Statement provides that:

The Policy provides Income Protection Cover. In the event of you being totally or partially disabled as a result of sickness or injury and you being unable to work at full capacity, we will pay you an ongoing monthly benefit amount. The disability may be short term or long term.

Possible reasons for holding the cover include to replace a portion of your income, help ensure you are able to pay your bills, and to assist in maintaining your standard of living.

You have received monthly payments since Date one equivalent to a percentage of your wages. These amounts are labelled as Total disability monthly benefits on the statement of payment you have provided.

From Date one to Date 2, you received income protection payments for partial disability.

From Date 3, you have been receiving monthly income protection payments for total disability (the monthly payments). These amounts are labelled as Total disability monthly benefits on the statement of payment you have provided.

On Date 4, you were further injured adding to your inability to earn income.

You have included the payments in your income tax returns for income years ending 30 June 20XX and 30 June 20XX.

Tax has not been withheld from the payments and you have not claimed a deduction for the premium payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Summary

The monthly payments you receive are included in your assessable income.

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.

Periodic payments received during a period of total or partial disability under an income protection policy are included in your assessable income on the same principle as salary and wages.

Therefore, the received sums are ordinary income and are included in your assessable income under section 6-5 of the ITAA 1997 in the income years in which the payments are received.