Private ruling: Timing of income
Published: April 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: I s the lump sum received from an income protection policy assessable when received? | A1: Yes

Relevant facts and circumstances: You were employed during the 2010-11 financial year after which you lost your job. You had an income protection insurance policy. After losing your job, you applied for an insurance payout and you were paid for a period that extended over the 2010-11 and 2011-12 financial years. You received a lump sum payment prior to 30 June 2011.

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

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. Payments of salary and 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 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 89 ATC 5142, 20 ATR 1516; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433). In your case you received an income protection insurance payout because you lost your job. The payment was to replace lost income. Therefore the lump sum payment retains the characteristics of ordinary income even though it was paid as a lump sum. The compensation payment is ordinary income. Accordingly your lump sum is assessable under section 6-5 of the ITAA 1997. Taxation Ruling TR 98/1 sets out the Commissioner's policy on the derivation of income. Paragraph 42 of the ruling states that 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. Therefore, although part of the payout that you received from your insurance policy relates to the following financial year, it is assessable in the year you received it.

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