ATO ID 2010/120: Tax exemption: payments received by Australian resident from Income Protection Policy - payments replace income (exempt foreign employment income)
Date of decision: 11 May 2010
Year of income: Year ended 30 June 2010
Business line: Public Groups and International

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
Summary: 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: (a) income consisting of salary, wages, commission, bonuses or allowances, or of amounts included in a person's assessable income under Division 83A of the Income Tax Assessment Act 1997 (about employee share schemes), derived by the person in his capacity as an employee of an eligible contractor; or (b) income, or amounts included in a person's assessable income under that Division, derived by the person under a contract with an eligible contractor, being a contract that is wholly or substantially for the personal services of the person; 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.

Legislative references: Income Tax Assessment Act 1936 subsection 23AF(1) subsection 23AF(18)
Subject references: Approved overseas projects Australians overseas Income protection insurance International tax