Private ruling: Lump sum - income protection
Date of advice: 28 September 2020
Published: November 2020
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can the lump sum payment received for surrendering the Income Protection Cover be assessed on the smaller amount detailed in Table 1, instead of in full in the income year ended 30 June 20XX? | A1: No | Q2: Can the lump sum payment received for surrendering the Income Protection Cover be apportioned over future income years in amounts detailed in Table 2, until the payment is exhausted? | A2: No

Relevant facts and circumstances: On XX/XX/XXXX you received a lump sum insurance payout from your Insurer for the sum of $XXX,XXX.XX. You provided a bank statement showing $XXX,XXX.XX deposited by the Insurer into your bank account on XX/XX/XXXX. The lump sum insurance payout was for surrendering your Income Protection Cover with the Insurer in which you have been receiving payments for since XX/XX/XXXX after ceasing work on XX/XX/XXXX due to injury. You provided the Insurers XXXX/XX benefits summary showing: · Product name · Insurance type: Income Protection · Total benefits paid: $XXX,XXX.XX · Portion of benefits that are not assessable: $X.XX · Whether you are self-employed or an employee the premiums paid for your disability insurance are tax deductible, and benefits received are assessable and should be declared by you as income received for the financial year. You provided a Deed of Release document. A summary follows: By You ("Claimant") in Favour of the Insurer Background: A. The claimant is the owner of, and life insured under a Policy held by the Insurer, identified by number XXXXXXXX, which commenced on XX/XX/XXXX ("Policy") B. Under the policy the Claimant has the following cover: (a) Income Protection Plus ("Income Protection Cover") (b) Critical Illness Standalone ("Critical Illness Cover") C. The Income Protection Cover under the Policy provides for payment by the Insurer of income protection benefits in the event of the Claimant's disability, subject to the terms and conditions of the Policy ("Benefits"). D. The Claimant made a claim for Benefits under the Income Protection Cover under the Policy ("Claim") after ceasing work on XX/XX/XXXX. The Insurer accepted the Claim and paid income protection benefits to the Claimant for the period from XX/XX/XXXX to XX/XX/XXXX. E. The Insurer has made an offer to pay the Claimant the amount of $XXX,XXX in return for: (a) the Claimant surrendering all of his remaining rights and entitlements to Benefits under the Income Protection Cover under the Policy, including all income and other benefits under the Policy in respect of the Claim on and from XX/XX/XXXX; and (b) the Income Protection Cover under the Policy being cancelled with effect from the date the Claimant's execution of this Deed. ("Offer") The Claimant has accepted the Insurer's Offer on the terms set out in this Deed. Agreement: 1. In consideration of the Insurer paying to the Claimant the sum of $XXX,XXX.XX ("Agreed Sum"), the Claimant hereby releases and discharges the Insurer from any claim, action, damage, loss or liability, including for interest and costs, whether known or unknown, legal or equitable, he (or any person entitled to claim through him) has or may have against the Insurer, arising from, or in relation to, the Claim the subject matter of the Claim or the Policy (as it relates to the Income Protection Cover). 7. The Claimant and the Insurer agree that the Critical Illness Cover will continue under the Policy subject to payment of premiums, and the terms and conditions of the Policy. 10. The Agreed Sum is inclusive of relevant taxes, whether GST or otherwise and the Insurer makes no deduction for any tax. The Claimant acknowledges that the responsibility for remitting any taxes incurred in respect to the Agreed Sum is solely that of the Claimant and the Claimant indemnifies the Insurer in respect of any tax liability which may arise with respect of the Agreed Sum. You provided a letter from your Lawyers dated XX/XX/XXXX regarding the Income Protection Lump Sum Settlement. Your Lawyer reviewed the deed and confirms that you will pay income tax on this sum. A copy of the letter referred to by your Lawyer was not provided. You provided a table (Table 1) showing the payments received from the Insurer over the income year ended 30 June XXXX to the income year ended 30 June XXXX. Table 1 shows the overall average percentage increase of the payments received each income year is XXX.XX%. You request that the assessable amount for the income year ended 30 June XXXX be $XXX,XXX.XX not the full lump sum payment of $XXX,XXX.XX. You calculated the reduced amount of $XXX,XXX.XX by multiplying the payment received in the income year ended 30 June XXXX of $XX,XXX.XX by the overall average percentage increase of XXX.XX% shown in Table 1. Table 1 Removed You provided your Insurer's benefit statements for the income years ended 30 June XXXX to 30 June XXXX confirming the payment amounts received in Table 1. You also request apportionment of the remaining balance of the lump sum payment to be assessed over future income years ended 30 June XXXX to 30 June XXXX. You provided a table (Table 2) showing the requested estimated assessable amounts for the income years ended 30 June XXXX to 30 June XXXX. Table 2 Removed You calculated the estimated assessable amounts by multiplying the estimated assessable amount from the previous income year by the overall average percentage increase of XXX.XX% (shown in Table 1)

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 6-5(4)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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. An amount paid to compensate for loss generally acquires the same nature of what it is substituting ( 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 under ordinary concepts ( FC 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). Ordinary income has been held to include three 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 received as a product of any employment, services rendered, or any business; · are earned; · are received regularly or periodically; · are expected; and · are relied upon. It is not necessary for all of these characteristics to be present for an amount to be considered ordinary income. A lump sum payment is generally classified as ordinary income if it is simply a lump sum made up of periodic income payments but paid in arrears to cover a certain period. Income protection policies provide for periodic payments in the event of loss of income caused by the insured becoming disabled through sickness or injury. These payments are assessable as income under section 6-5 of the ITAA 1997, as they are paid to take the place of lost earnings. This view has been subsequently confirmed in Sommer v. FC of T 2002 ATC 4815; (2002) 51 ATR 102 ( Sommer's case) where a lump sum paid to a doctor in settlement of his claim under an income protection policy was assessable on the basis that it was in substitution for his original claim under the policy for lost income. The taxpayer argued that the amount comprised an un-dissected aggregation of both income and capital and, therefore should be treated as capital. The taxpayer's case was dismissed in the Federal Court and it was held that the commercial reality of the payment was that it was a full and final settlement of all the taxpayer's income claims. The fact that it was a lump sum did not change its revenue nature. The decision in Sommer's casewas followed in Gorton v. FC of T 2008 ATC 10-018, where a lump sum payment received by a former medical practitioner from his insurer in settlement of his professional income replacement claims was held to be assessable income. Your circumstance has similarities to the taxpayer's in the above cases as you were also receiving Income Protection Insurance payments and you received a lump sum payment for the remaining benefit and finalisation of your Income Protection Cover. Your Lawyer has also confirmed that you are liable to pay income tax on the lump sum payment. However, you are not questioning whether the lump sum payment is assessable but whether the payment can be apportioned and assessed on smaller amounts over future years. Income is derived when you are able to direct how it is dealt with on your behalf (subsection 6-5(4) of the 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 Income tax: determination of income; receipts versus earnings (TR 98/1) gives the Commissioner's view as to when income is received. Paragraph 41 of TR 98/1 states: 41. Generally, for non-trading income, it is when amounts are received that they have, applying the words of Dixon J, 'come home to the taxpayer in a realized or immediately realizable form'. Further, paragraph 42 of TR 98/1 states: 42. Income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period. In your circumstance, when the lump sum payment was deposited by your Insurer into your bank account on XX/XX/XXXX, the payment was credited and made available for you to do as you wish. The lump sum payment that you received from the Insurer in advance of your future monthly payments is to replace income. The lump sum payment received will need to be included as part of your assessable income under section 6-5 of the ITAA 1997 as ordinary income in the income year in which it was received, being the income year ended 30 June 20XX. We acknowledge your circumstances and associated tax liabilities. However, the Commissioner has no discretion to assess the payment in any other income year as you have requested, other than when it was received by you.