Private ruling: Assessable income - lump sum income protection payment
Date of advice: 30 June 2022
Published: October 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: DD Month YYYY

Ruling: Q1: Will the Commissioner exercise his discretion to tax a lump sum commutation of a periodic income protection benefit over the remaining years of the policy rather than as a lump sum in the year of receipt? | A1: No. | Q2: Will the Commissioner waive the interest which has accrued on the amount outstanding on this taxation account for the remaining tax liability? | A2: Decline to rule.

Relevant facts and circumstances: You were diagnosed with a severe medical condition and you have been unable to work. You were the owner of an income protection insurance policy. You successfully made a claim on your income protection policy. You were involved in serious car accident sustaining permanent injuries during your claim period, which have also exacerbated your medical condition. Following your car accident, your income protection policy provider offered you a lump sum payment in full and final resolution of your claim and policy. The policy benefit of your income protection policy was to conclude on your birthday in approximately nine years. You accepted the offer and were paid a lump sum. You included the lump sum in your income tax return in the year of receipt, resulting in a substantial tax liability. Considerable general interest charges have been added to your tax liability.

Relevant legislative provisions: Income tax assessment act 1997 Section 6-5 | Income tax assessment act 1997 Section 5-15 | Tax administration act 1953 Part IIA | Tax administration act 1953 Section 8AAAG | Tax administration act 1953 Section 359-35 | Taxation ruling 98/1 Income tax: determination of income; receipts versus earnings

Reasons for decision: Summary: Assessable income includes all ordinary income derived directly or indirectly from all sources under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and is assessable when it is received by the taxpayer, even though it may relate to a past or future income period under paragraph 14 of Taxation Ruling 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1). There is no provision to allow the Commissioner of Taxation to apply discretion in relation to the application and administration of assessable income legislation for an individual taxpayer. | Detailed Reasoning - Detailed Reasoning: Subsection 6-5(2) of the 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. Generally, it is the nature of a payment that determines if it is considered ordinary income. The characteristics of ordinary 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. Paragraph 42 of TR 98/1 outlines the ATO view that income from employment is normally assessable on a receipt basis. Salary, wages, or other employment remuneration are assessable when they are received by the taxpayer even though they may relate to a past or future income period. Essentially, the income period that income is received is the income period where the income is taxed at the applicable rate for the total amount of income for that period, regardless if the income is from a prior or for a period in the future. It has also been widely established through case law that a payment to a taxpayer that compensates for loss of income, holds the same nature as income and is assessable within the year it is received. In the case of Sommer v. FC of T 2002 ATC 4815; (2002) 51 ATR 102 ( Sommer's case), the Federal Court of Australia ruled in favour of the Commissioner of Taxation and the Administrative Appeals Tribunal, that a lump sum payment received by a taxpayer in relation to an income replacement policy, where they had agreed to cancel the policy and surrender any rights under it, was considered assessable income. Furthermore, the fact that the payments of the monthly benefits were made in one lump sum did not change the character of the receipt as it was designed to compensate the taxpayer in respect of their income. The decision of Sommer's case was followed in Gorton v. FC of T 2008 ATC 10-018 ( Gorton's case) where a taxpayer was injured in a motor vehicle accident and accepted a lump sum payment from an income replacement policy. They signed a deed of release that extinguished the policy and any right to make further claims under it in acceptance of the lump sum payment. The Administrative Appeals Tribunal confirmed that the lump sum formed part of the taxpayer's assessable income under section 6-5 of the ITAA 1997 for the relevant income year at the relevant individual tax rate. Additionally, for the Commissioner to apply discretion within a private ruling, there must be a provision outlined in the legislation to allow it. As an example, section 118-195 of the ITAA 1997 outlines that a beneficiary who acquires a house from a deceased estate may sell the dwelling and disregard any capital gain from the sale of the property. Paragraph 118-195(1)(b) of the ITAA 1997 lists conditions that must be applied, nominating specifically "[their] ownership interest ends within 2 year of the deceased's death, or within a longer period allowed by the Commissioner" . The addition of "a longer period allowed by the Commissioner" indicates that the Commission has the discretion under the legislation to extend the amount of time in the application and administration of this legislation. In relation to assessable income, there is no such provision to allow the Commissioner any discretion. Elements of your circumstances are mirrored within Sommer and Gorton's cases in that you have received a lump-sum payment in finalisation of your income protection claim and policy. Regardless of whether the benefits of your policy are paid in instalments over a matter of years or a lump-sum payment, any income you receive within a specific income year is assessable within that year under section 6-5 of the ITAA 1997 and paragraph 42 of TR 98/1. Finally, the legislation simply does not contain a provision for the Commissioner to apply discretion in relation to assessable income to effectively 'split' income and its tax liability over future years. | Detailed Reasoning - Question 2: Will the Commissioner waive the interest which has accrued on the amount outstanding on this taxation account for the remaining tax liability? | Detailed Reasoning - Answer: Decline to rule. | Summary: Subsection 359-35(2) of the Tax Administration Act 1953 (TAA 1953) outlines that the Commissioner may decline to make a private ruling if it is considered that making the ruling would prejudice or unduly restrict the administration of a taxation law. | Detailed Reasoning - Detailed Reasoning: Section 5-15 of the ITAA 1997 contains the core provision relating to interest charges on unpaid income tax with Part IIA of the TAA 1953 providing details on how it is calculated and applied. Interest is charged on unpaid tax liabilities to ensure fairness for taxpayers who do pay on time and the community. We have declined to rule on this matter as any ruling provided would unduly restrict the application of Part IIA of the TAA 1953 in relation to how the interest is calculated and charged, including section 8AAAG of the TAA 1953 which outlines the provisions where the Commissioner can remit general interest charges. | Detailed Reasoning - General Guidance: In the interest of sound administration, we have provided the following guidance that is general in nature and is not binding on the Commissioner. We can generally remit (reduce or cancel) interest charges and penalties where fair and reasonable in specific circumstances. For further information about requesting remission of interest or penalties, go to www.ato.gov.au and search for ' QC 33806 '.

Reasons for decision: These reasons for decision accompany the Notice of private ruling. | This is to explain how we reached our decision. This is not part of the private ruling.