Private ruling: Assessable income - insurance policy lump sum payment
Date of advice: 7 March 2017
Published: August 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the lump sum payment proposed by your insurer be included in your assessable income? | A1: Yes. | Q2: Is this insurance payment subject to concessional taxation rates? | A2: No

Relevant facts and circumstances: You took out an income protection plan. Your income protection plan provides a 'benefit period for injury' to be paid to you for life. You suffered a work related injury. You have not been able to work since. You receive a regular monthly payment from the insurance company. Your insurance company is offering you a lump sum payout as full and final settlement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 15-30

Reasons for decision: Summary: Ordinary income has generally been held to include 3 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. Some examples of ordinary income include payments of salary and wages and partnership distributions. 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 ( Inkster ) and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411). As such, periodic payments received under an income protection policy during a period of total or partial disability are assessable as ordinary income where the payments are received to replace the income that would have been earned during that period if not for the disability. Whether the redemption or conversion of an entitlement to periodic payments of compensation into a lump sum affects the assessability of the compensation has been considered by the Courts and Boards of Review in a number of cases. As a general rule, a lump sum payment takes on the income nature of the periodic payments that it replaces. In your case, you received regularly monthly payments. You have been offered a lump sum payment in full and final settlement of your claim. As the periodic payments you were entitled to receive under the policy were paid in substitution for your loss of earnings, and not for any loss of earning capacity, the proposed lump sum payment is considered ordinary income as it takes on the income nature of the periodic payments it will be paid to replace. Therefore, this payment would be considered ordinary income and will be included in your assessable income under 6-5 of the ITAA 1997 in the year it is received. The tax rates for the 2016-17 year are set out below: Taxable Income Tax on this income 0 - $18,200 Nil $18,201 - $37,000 19c for each $1 over $18,200 $37,001 - $87,000 $3,572 plus 32.5c for each $1 over $37,000 $87,001 - $180,000 $19,822 plus 37c for each $1 over $87,000 $180,001 and over $54,232 plus 45c for each $1 over $180,000 The above rates do not include the: ● Medicare levy of 2% ● Temporary Budget Repair Levy; this levy is payable at a rate of 2% for taxable incomes over $180,000. While we appreciate your circumstances the Commissioner does not have any discretion to not apply the rates set out above.