Private ruling: Mortgage protection insurance
Published: December 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are unemployment benefits paid directly to your home loan under the terms of an income care insurance policy assessable income? | A1: Yes.

Relevant facts and circumstances: You hold an income care insurance portfolio. The income care insurance portfolio is a product that combines income benefits, disability benefits, death benefits, medical professional benefits, home care benefits as well as loan protection and unemployment benefits. You became unemployed in the 2010 financial year. During the 2010 financial year you received unemployment benefits for a three month period. The amounts were paid directly to your home loan account by the insurance company. The benefit provided by the insurance policy only covers your minimum monthly loan repayment for a maximum period of three months.

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

Reasons for decision: Summary: The payments applied to your home loan are considered to be amounts that replace your income from salary and wages. Therefore the payments are assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Based on case law, it can be said that ordinary income generally includes receipts that are earned, 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: Federal Commissioner of Taxation 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: 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. A monthly benefit paid under an insurance policy is intended to provide financial support and assistance for the person insured. While not earned, such payments are expected and relied upon by the insured, and being paid monthly, are recurring and regular. These benefits paid under a policy of insurance effectively replace a taxpayer's income from salary and wages. Taxation Ruling TR 98/1 provides that under the receipts method, income is derived when it is received either actually or constructively under subsection 6-5(4) of the ITAA 1997. Subsection 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it is derived, a taxpayer is taken to have received the amount when it is applied or dealt with in any way on their behalf or as directed by them. An amount is treated as having been received as soon as the taxpayer gets a benefit from it. In your case you took out insurance to cover your private home loan payments in the event of your inability to work. When you became unemployed, your insurance company paid amounts directly to your home loan for a period of three months. These payments were derived by you when they were applied to your home loan account. It is considered that the monthly payments effectively replace your income from salary and wages. Therefore the payments applied to your home loan under the insurance policy are assessable income under section 6-5 of the ITAA 1997.

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