Private ruling: Apportioning an insurance payout over multiple financial years, compensation payout partly for a future year
Date of advice: 18 February 2020
Published: March 2020
Ruling period: 1 July 20XX to 30 June 20XX | 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you apportion your income protection payments over two financial years as a result of receiving a lump sum to finalise the policy? | A1: No

Relevant facts and circumstances: You were covered by income protection insurance through your insurer due to a medical condition and have been in receipt of payments for a period of time. The payments were made to you on a monthly basis. The income protection policy was held within your superannuation and you are not seeking to claim deductions. The insurer provided you with a payment summary for the 20XX-XX financial year, which covered greater than 12 months of payments. This finalised your income protection claim. This was not a total and permanent disability (TPD) claim. The insurer did not offer you the option to receive the payments that were to be made as either a lump sum or as an income stream. The insurer deemed your illness ongoing and agreed to pay out the remainder of the claim in a particular month. You would have opted for the income stream if offered. There was no determining factor in making the payment as a lump sum. You were not in need of the monies for medical expenses or any other financial hardship. You provided a schedule of payments made by the insurer for the 20XX-XX financial year. The advanced payments moved you into a higher tax bracket and tax was withheld at a lower bracket. The lump sum included amounts that were meant to be for the next financial year; however as were paid within the one financial year. The lump sum in the 20XX-XX financial year has resulted in you having to pay tax at a higher tax bracket, Medicare Levy Surcharge and either removed or reduced your income tax offset eligibility. The lump sum will effectively cost you approximately $X. You advised that the insurer made phone contact prior to finalising the income protection claim. You stated that this would save you from going to the doctor periodically to obtain a report and reduced your stress. You contacted the insurer after receiving the payment summary for the 20XX-XX financial year, to resolve this issue. You received a letter from the insurer which included a table summarising the payments made to you in the 20XX-XX financial year. You believe the decision by the insurer to make a lump sum through convenience, has penalised and disadvantaged you financially. You are no longer able to work and have no income. If required to pay a tax debt you have no will not be able to do so.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Taxation Administration Act 1953 section 18-15

Reasons for decision: Summary: Income is derived when you are able to direct how it is dealt with on your behalf (subsection 6-5(4) of the Income Tax Assessment Act (ITAA 1997)). Therefore a person is taken to have received an amount of income when it is dealt with as they have requested. It is derived at the time the amount is credited and made available for the person to do with as they wish. Taxation Ruling TR 98/1 gives the Commissioner's view as to when income is received. At paragraph 41 it states that for non-trading income, amounts are received when they are in an immediately realisable form. 'Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or a future income period' (paragraph 42 of TR 98/1). A person is entitled to a credit equal to the total of the amounts withheld from withholding payments made to the person during an income year (section 18-15 of Schedule 1 to the Taxation Administration Act 1953 ). This credit is known as a PAYG withholding credit and is available if an assessment has been made of the tax payable. The lump sum payment that you received from the insurer in an advance of your future monthly payments is to replace income and will need to be included as part of your assessable income in the financial year in which it is received. The tax that was withheld by the insurer from the payments will assist in reducing the tax that is payable on the amount. We acknowledge your circumstances and associated tax liabilities. However, the Commissioner has no discretion to amend your payment summary issued by the insurer or to assess the payment in any other income year than when it was received by you.