Private ruling: Foreign income - income protection policies
Date of advice: 21 November 2025
Published: 5 January 2026
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: XX XXXX 20XX

Ruling: Q1: Is the Country A long-term income protection disability insurance you receive while a dual citizen (Country A and Australia), considered exempt income under the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: On XX XXXX 20XX, you were born. You are a dual Australian and Country A citizen. On XX XXX 20XX, you commenced employment with Employer A in Country A. As part of your employment with Employer A you were covered by the policy, Long-Term Disability (LTD) Benefit Enhancement. The LTD covered income protection if illness or injury made it impossible for you to work for an extended period. Employer A enhanced the company paid LTD benefit to cover XX% of your pre-disability income up to a maximum of $XX per month. When enrolling into the LTD, you selected the non-taxable election option. Under this option, you agreed to pay a small amount of tax on the LTD premium Employer A pays on your behalf. The advantage of choosing this option was that should you have a disability and become eligible to receive benefits, the income paid to you would be tax-free in Country A. On XX XXXX 20XX, you started receiving monthly income in or around $XX from your LTD. The income is deemed non-taxable income in Country A. You do not need to disclose the income in lodging tax returns in the Country A. You are unemployed due to your health and disability. Your only source of income is the LTD. On XX XXXX 20XX, you permanently moved back to Australia. While in Australia, you remain a Country A tax resident due to your citizenship in Country A. The payments will stop once you are no longer disabled, or you reach the age of 65.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 subsection 6-15(2) | Income Tax Assessment Act 1997 subsection 6-20(2) | International Tax Agreements Act 1953

Reasons for decision: Summary: Periodic payments received during a period of total or partial disability under an income protection policy are included in your assessable income on the same principle as salary and wages. Therefore, the received sums are ordinary income and are included in your assessable income under section 6-5 of the ITAA 1997 in the income years in which the payments are received. | Detailed Reasoning - Detailed reasoning: 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. 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 generally 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. 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, as they are paid to take the place of lost earnings. Subsection 6-15(2) of the ITAA 1997 states that if an amount is exempt income, then it is not assessable income. Subsection 6-20(2) of the ITAA 1997 states that ordinary income is exempt income to the extent that 'this Act' excludes it (expressly or by implication) from being assessable income. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act therefore forms part of 'this Act'. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). There is a double tax agreement (DTA) which operates to avoid the double taxation of income received by residents of Australia and Country A by allocating taxing rights between the two countries. | Detailed Reasoning - Application to your circumstances: As the periodic payments you are entitled to receive under the income protection policy are paid in substitution for your loss of earnings, and not for any loss of earning capacity, the received sum is considered ordinary income as it takes on the income nature of the periodic payments it was paid to replace. Periodic payments received during a period of total or partial disability under an income protection policy are included in your assessable income on the same principle as salary and wages. There is no provision in the ITAA 1997 that exempts the Country A long-term disability insurance payments; instead, these amounts are treated as assessable income under section 6-5. In addition, there is no article under the DTA which exempts the income in Australia. Therefore, the received sums are ordinary income and are included in your assessable income under section 6-5 of the ITAA 1997 in the income years in which the payments are received.