Private ruling: Assessable income - income protection policy
Published: July 2012
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Will any payments you receive from an income protection insurance policy be assessable income? | A1: Yes.

Relevant facts and circumstances: You are over 55 years old. You are considering securing an income protection insurance policy. You are currently employed full time and intend to be employed full time until you are at least 65 years of age. The proposed policy is intended to provide you a cash benefit for one to two years if you are unable to work for medical reasons. You will require the benefit to cover your day to day expenses if you were unable to work. The benefit will be provided as a periodic payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Based on case law, it can be said that ordinary income generally includes receipts that: · are earned · are expected · are relied upon, and · have an element of periodicity, recurrence or regularity. Payments of salary or wages, including payments made under an insurance policy that replaces salary or wages, are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997. 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 AITR 443; 10 ATD 82). Compensation payments which are paid to substitute income have been held by the courts to be income under ordinary concepts ( F C of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641 ; Case Y47 (1991) 22 ATR 3422; 91 ATC 433). In your case, if you cannot work due to medical reasons, you may receive benefits under an income protection policy. The purpose of the policy will be to provide you with income in the event of you being unable to work. The amount to be paid under a policy will be earned because of your rights under the policy. It will also be expected, and have an element of periodicity, recurrence or regularity. Any payments you may receive from an income protection insurance policy are intended to replace your salary and wage income. Therefore, these payments will be assessable under subsection 6-5(2) of the ITAA 1997.

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