Private ruling: Salary continuance payments
Published: February 2013

Ruling: Q1: Are you entitled to any tax benefits in relation to your salary continuance payments? Answer No. This ruling applies for the following periods Year ending 30 June 2011 Year ending 30 June 2012 The scheme commenced on 1 July 2010


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 Detailed reasoning | Salary continuance payments | Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year. | Salary and wages are regarded as ordinary income. | For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). | Payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). | Payments under a salary continuance policy are paid to substitute salary and wages and are regarded as assessable income. | In your case, you received salary continuance payments when you were unable to work full time. The payments received were to replace lost earnings (salary). The purpose of the payments was a substitute for the income which you would otherwise have earned. Such payments are assessable under section 6-5 of the ITAA 1997. | The total payments are regarded as ordinary assessable income and are assessable under subsection 6-5(2) of the ITAA 1997. | Income and tax rates | Sections 11-10 and 11-15 of the ITAA 1997 list income which is exempt. Unfortunately, the legislation does not provide an exemption or tax concession in your specific circumstances. | Therefore your income is taxed at the marginal tax rates. The rates of tax for the 2011-12 income year are: | Taxable income | Tax on this income | 0 - $6,000 | Nil | $6,001 - $37,000 | 15c for each $1 over $6,000 | $37,001 - $80,000 | $4,650 plus 30c for each $1 over $37,000 | $80,001 - $180,000 | $17,550 plus 37c for each $1 over $80,000 | $180,001 and over | $54,550 plus 45c for each $1 over $180,000


Relevant facts: You were diagnosed with an illness. You proceeded with treatment. | You are unable to work full time. | During the 2011-12 income year you received salary continuance payments. | You also received income from your employer. | Your notice of assessment for the 2011-12 income year resulted in a tax bill. | When completing the initial paperwork for your salary continuance payments you selected to claim the tax free threshold as it was a continuation of your salary. | You have since been advised that this was incorrect.