Edited version of your written advice

Authorisation Number: 4110050572414

Date of advice: 15 June 2018

Ruling

Subject: Income protection policy-assessable income

Question

Are the payments that you have received through your income protection policy assessable as ordinary income?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

You being K are the insured person under an Insurance policy (policy).

You pay monthly premiums to derive the benefit under this policy. Your policy includes the following benefits:

You have policies that provide the following cover:

● Life cover to your family in the event of your death

● Linked TPD (trauma policy).

Under your income protection policy you receive a percentage of your monthly income if you are unable to work due to illness or injury.

The income protection policy benefit provides you with a monthly payment in the event you are unable to perform work as part of your businesses. You conduct a number of businesses.

You had an illness some years ago that impaired your ability to conduct your businesses and resulted in you working substantially less hours per week.

You reported to your insurer the periods in which you were unable to work and lost income as a result of the reduced hours in which you were working. You were unable to return to your pre-existing work arrangements.

Some years after your illness, the insurer disputed your claim under the trauma policy on the grounds that you had a previous diagnosed medical condition. No payments were made to you in respect to the trauma policy.

You used the above payments you received under your income protection policy to employ staff to undertake your role and assist your spouse who also operates the businesses.

Because of your ongoing incapacity and stress caused to you and your spouse in dealing with the insurance claim, you decided to sell various businesses. The businesses will be sold over a period of time.

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

Summary

The periodic payments you were entitled to receive under the policy were not payments connected with your loss of earning capacity caused by your illness. The sole purpose of the periodic payments was to substitute for the income you would have otherwise earned if not for your incapacity to earn as a result of your illness. The payments you received were to replace lost income arising from your illness and are therefore assessable as ordinary 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 were entitled to receive under the income protection policy were 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 sum is ordinary income and it is included in your assessable income under section 6-5 of the ITAA 1997 in the income year in which the payments were received.