ATO ID 2003/42: Trust income - assessability of employer contributions to an Income Protection and Portable Sickness Benefit Fund
Date of decision: 15 November 2002
Year of income: Year ended 30 June 2001 Year ended 30 June 2002
Business line: Business and Personal Tax Centre of Expertise

Issue
Is the taxpayer, a trustee, assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) on contributions received from participating employers to an Income Protection and Portable Sickness Benefit Fund (the fund)?

Decision
No. The taxpayer is not assessable under section 6-5 of ITAA 1997 on contributions received from participating employers to the fund.

Facts
As a result of an Enterprise Bargaining Agreement the fund was established. The fund is a trust. The taxpayer is the trustee of that trust. The purpose of the fund is to establish a scheme under which employees in an industry may be insured for the provision of income protection and portable sick leave. The fund uses the contributions made by participating employers to purchase these insurance policies. All claims against these policies are paid directly to the employees. On termination of the fund, any surplus is to be paid to an income protection or portable sick leave insurance scheme with purposes similar to those of the fund.

Reasons for decision
Summary: Subsection 6-5(1) of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts (ordinary income). Whether the employers' contributions are assessable income of the fund under section 6-5 of the ITAA 1997 depends on whether they represent income according to ordinary concepts. In Scott v. Federal Commissioner of Taxation (1966) 10 AITR 367; (1966) 117 CLR 514; (1966) 14 ATD 286 Windeyer J stated that : 'Whether or not a particular receipt is income depends upon its quality in the hands of the recipient.' In G.P. International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 21 ATR 1; 90 ATC 4413 the High Court considered the following factors were important in determining the nature of a receipt: 'To determine whether a receipt is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.' The purpose of receiving the employers' contributions is solely to establish the scheme under which employees in that industry may be insured. As such, the payments in the hands of the taxpayer are of a capital nature as they represent the corpus of the trust. Accordingly, the employers' contributions are not assessable income under section 6-5 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 6-5 subsection 6-5(1)
Case references: G P International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124 90 ATC 4413 (1990) 21 ATR 1
Subject references: Trust income