Private ruling: Assessability of income protection payment
Published: April 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the lump sum payment received from an income protection insurance policy assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) when received? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts, which is called ordinary income. The term `income according to ordinary concepts' is not defined in the ITAA 1997. Its meaning has evolved from case law. Generally, receipts that have an element of periodicity, recurrence or regularity will be considered to be of an income nature. Income protection policies provide for periodic payments in the event of loss of income caused by the insured becoming disabled through sickness or injury. The Commissioner's view as stated in ATO Interpretative Decision ATO ID 2002/175 is that such periodic payments are ordinary income and assessable under section 6-5 of the ITAA 1997. In this case you received a lump sum payment in lieu of periodic (fortnightly) payments. Taxation Determination TD 93/58 gives the Commissioner's view that where a payment is compensation payment for loss of salary and wages such a payment retains the characteristics of ordinary income even though it was paid as a lump sum. The lump sum compensation amount you received is a payment for loss of income and is therefore ordinary income and assessable under section 6-5 of the ITAA 1997. While the lump sum may be calculated by reference to fortnightly payments, how the payment is calculated, does not determine when the amount is assessable. Taxation Ruling TR 98/1 describes the appropriate methods for determining when income is derived. The term `derived' is defined in paragraph 26 of TR 98/1. For some taxpayers the income they derive in a year is the income received in that year and for other taxpayers the income they derive in a year is the income earned in that year. Paragraph 8 of TR 98/1 describes the `receipts' method which is sometimes called the `cash received' basis or `cash' basis. Under the receipts method, income is derived when it is received, either actually or constructively, under subsection 6-5(4) of the ITAA 1997. Paragraph 18 of TR 98/1 describes the situations where the receipts method should be adopted to determine when income is derived. Your income is to replace salary or wage income which is derived from the provision of knowledge or the exercise of skill possessed by you. TR 98/1 ruling states that it is appropriate to use the receipts method in this situation. As your income is derived when it is received the lump sum payment from your income protection insurance policy is assessable under section 6-5 of the ITAA 1997 in the year of income in which it is received, that is, the 2011-12 income year.

Relevant facts: You received a lump sum income protection payment in the 2011-12 income year. The payment relates to the time you were off work due to an injury. | You were issued with a PAYG payment summary showing the gross payment and there was no tax deducted. | Further information from the payer classifies the payment as an income protection payment, for the period you were off work.