Private ruling: Credit Protection Policy deductions
Date of advice: 11 October 2017
Published: March 2018
Ruling period: Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you entitled to a deduction for the premium you incurred on the accident and sickness component and the involuntary unemployment component of your credit protection insurance policy? | A1: Yes

Relevant facts and circumstances: You have taken out a loan with a bank and purchased a property. You purchased a credit protection insurance policy with the bank with respect to this loan which provides that an Insurance writer will pay your minimum monthly loan repayments as a benefit to the bank, or as directed by the bank, in the following circumstances: If you have accident and sickness cover and you are unable to work for a period of more than 30 days due to an accident or sickness, Credit Protection will pay your minimum monthly loan repayments after the first 30 days for up to 36 months. If you are off work due to stress, depression or any other mental or nervous disorder, repayments will be met under Credit protection for a maximum of 12 months (subject to benefit limits and exclusions). If you have involuntary unemployment cover and you are involuntarily unemployed for a period of more than 30 days, Credit Protection will pay your minimum monthly loan repayments after the first 30 days for up to 6 months for any one claim (subject to benefit limits, exclusions and conditions). You purchased the credit protection insurance for the period commencing 20XX and ending 20XY. The total monthly premium for your cover has 3 separate components being for life cover, for accident and sickness cover and for involuntary unemployment cover. Approval of the loan was not associated with or conditional upon the purchase of the credit protection insurance policy.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1936 Section 51(1)

Reasons for decision: Summary: The accident and sickness benefit and the involuntary unemployment benefit paid under your credit protection insurance would be characterised as income according to ordinary concepts and is therefore considered ordinary income within the terms of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). As such the premiums paid for the accident and sickness or the involuntary unemployment cover have the necessary connection with the earning of income required and are an allowable deduction under section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 provides that a taxpayer can deduct from their assessable income any loss or outgoing that they incur in gaining or producing that income. However, they cannot deduct an amount to the extent that it is capital, private or domestic in nature. The courts have developed a number of tests to determine if an expense satisfies the requirements of section 8-1 of the ITAA 1997. One consideration is that the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income. There must be a sufficient connection between the expense and the operations or activities which gain or produce the assessable income. Generally, an insurance premium is deductible under section 8-1 of the ITAA 1997 if it has the necessary connection with earning assessable income. In determining whether you have derived an amount of ordinary income, subsection 6-5(4) of the ITAA 1997 provides that you are taken to have received an amount when it is applied or dealt with in any way on your behalf or as directed by you. Based on case law, it can be said that ordinary income generally includes receipts that: ● are earned ● are expected ● are relied upon, and ● have an element of periodicity, recurrence or regularity. Payments of salary and wages, for example, are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted: FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts: FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142 ( Inkster's Case ), Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641 ( Tinkler's Case ), and Case Y47 (1991) 22 ATR 3422; 91 ATC 433. The Full High Court in FC of T v. Smith (1981) 147 CLR 578; (1981) 11 ATR 538; 81 ATC 4114, allowed a deduction for premiums paid to secure a monthly indemnity against the income loss arising from the inability to earn. It was held that there was sufficient connection between the purchase of the insurance cover against the loss of the ability to earn and the consequent earning of assessable income, and the outgoing was not of a capital, private or domestic nature. The deduction was allowed under subsection 51(1) of the ITAA 1936 (the equivalent of section 8-1 of the ITAA 1997). The credit protection insurance that you have taken out with the bank provides for monthly benefits to be paid out by the insurance writer in the event of you being unable to perform your usual occupation due to injury or illness or involuntary unemployment. The benefit is intended to provide financial support and assistance to you. While not earned, there is an expectation of their payment, they are relied upon by you, and being paid monthly, they have an element of periodicity, recurrence and regularity to them. Accordingly, these payments take on the character of ordinary income. Therefore, the premium paid for the accident and sickness cover and the involuntary unemployment cover has the necessary connection with the earning of this income and is an allowable deduction under section 8-1 of the ITAA 1997.