Private ruling: Income tax - assessable income - insurance policy income
Date of advice: 1 August 2019
Published: October 2019
Ruling period: Period ending 30 June 2020 | Period ending 30 June 2021 | Period ending 30 June 2022 | Period ending 30 June 2023 | Period ending 30 June 2024
Date scheme commenced: 1 July 2019

Ruling: Q1: Are payments you receive under your Lifetime Sickness option insurance policy assessable income? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You had an income protection insurance policy and you became seriously ill and were unable to return to work. Your insurance company and a number of specialist doctors declared you totally and permanently disabled and unable to ever return to work. From that time you have been receiving income replacement insurance payments from your insurer, and have been declaring these payments in your income tax, as they are assessable. Your payments under the income protection policy end X months after you turn XX. You elected to take up an insurance option known as Lifetime Sickness Option. This provides for payment to you for the rest of your life if you are diagnosed with a permanent disability. Under this option, payments are to be made monthly. The Lifetime Sickness Option forms part of the policy it is attached to, and everything in the policy applies to this option. These payments, to be received by you after the standard income protection policy ceases are not replacing income.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5(2)

Reasons for decision: Summary: Periodic income protection payments Subsection 6-5(2) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Based on case law, it can be said that ordinary income generally includes receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity. Payments of salary and wages are income according to ordinary concepts and are included in your assessable income. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443;10 ATD 82). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts ( FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411). Therefore periodic payments received during a period of total or partial disability under an income protection policy are included in your assessable income on the same principle as salary and wages. Ordinary income has generally 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 earned · are expected · are relied upon, and · have an element of periodicity, recurrence or regularity. Most trauma payments which are treated as capital are paid as a one off lump sum, and are not comparable to your situation. Your income replacement policy has a cease date of X months after your Xth birthday. If you wanted to insurance to provide income for yourself after then, an option you had was to take out the Lifetime Sickness Option. This policy provides you with an income stream for the remainder of your life, after your income protection policy ceases. Even though the Lifetime Sickness option policy is subsequent to the Income Replacement policy, the Lifetime Sickness Option forms part of the policy it is attached to, and everything in the policy applies to this option. The periodic payments you receive under the Lifetime Sickness option, replace the payments you had been receiving under the Income Protection policy, and even though the policy does not state they are for income replacement they are actually replacing the income replacement payments received under the original insurance policy. While acknowledging that the Lifetime Sickness payments will take over once the original income protection policy ceases after the age of XX, the arrangement between you, your employer and the insurer is just that, and there is no legislative requirement for retirement at age XX. There is also nothing in the legislation that prevents income received after the age of XX from being taxed in this circumstance. It is considered that the payments are providing you an income stream. It is also acknowledged that the income is not earned, and is not a product of any employment, services rendered or any business that you are engaged in. However they are expected, relied upon and regular. Periodic payments received during a period of total or partial disability under an income protection policy are included in your assessable income on the same principle as salary and wages.