ATO Interpretative Decision
ATO ID 2010/120
Income Tax
Tax exemption: payments received by Australian resident from Income Protection Policy - payments replace income (exempt foreign employment income)FOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Are payments received by an Australian resident under an income protection policy, to replace salary and wages considered to be 'eligible foreign remuneration' for the purposes of subsection 23AF(18) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. Payments received by an Australian resident under an income protection policy, to replace salary and wages are not considered to be 'eligible foreign remuneration' for the purposes of subsection 23AF(18) of the ITAA 1936.
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer worked on an 'approved project' as defined in subsection 23AF(18) of the ITAA 1936 for a period of not less than 91 days.
As an employee of an eligible contractor for the purposes of section 23AF of the ITAA 1936, the taxpayer received salary and wages that was directly attributable to the taxpayer's personal services in connection with the approved project.
Due to ill-health directly related to the conditions he worked under, the taxpayer returned to Australia and did not return to continue working on the approved project.
Subsequently, the taxpayer received monthly payments under an income protection insurance policy for a period of two years, which was the remainder of the life of the approved project. These payments were to replace the income he would have received if he had continued to work on the project.
The income the taxpayer received from the income protection policy was paid as part of an insurance policy that was taken out by the taxpayer. The income was paid by the insurance company and not by the employer.
Reasons for Decision
Subsection 23AF(1) of the ITAA 1936 provides that where an individual taxpayer has been engaged on 'qualifying service' on a particular approved project for a continuous period of not less than 91 days, any 'eligible foreign remuneration' derived by the person that is attributable to that qualifying service will be exempt from tax in Australia.
'Eligible foreign remuneration' is defined in subsection 23AF(18) of the ITAA 1936:
eligible foreign remuneration
in relation to a person, means income (not being excluded income) that is derived by the person at a time when the person is a resident, being:
that is directly attributable to qualifying service by the person on an approved project and includes any payments received in lieu of eligible leave that accrued in respect of a period during which the person was a resident and was engaged on qualifying service on an approved project.
One of the conditions that must be satisfied for income to come with the definition of 'eligible foreign remuneration' is that it must be derived by a resident individual either in his or her capacity as an employee of an eligible contactor or under a contract with an eligible contractor for his or her personal services.
The income the taxpayer received from the income protection policy, was paid directly under an insurance policy that was taken out by the taxpayer. As such, this income would not fall within the definition of 'eligible foreign remuneration' under subsection 23AF(18) as those payments were not derived by the taxpayer in their capacity as an employee of an eligible contractor or under a contract with an eligible contractor for the taxpayer's personal services.
Accordingly the payments received by an Australian resident under an income protection policy, to replace salary and wages are not considered to be 'eligible foreign remuneration' for the purposes of subsection 23AF(18) of the ITAA 1936. Hence the payments received would not qualify for the exemption under subsection 23AF(1) of the ITAA 1936.
Date of decision: 11 May 2010Year of income: Year ended 30 June 2010
Legislative References:
Income Tax Assessment Act 1936
subsection 23AF(1)
subsection 23AF(18)
Division 83A
Keywords
Approved overseas projects
Australians overseas
Income protection insurance
International tax
ISSN: 1445-2782