Issue
Are monthly payments received by the taxpayer under an income protection policy, assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. Monthly payments received by the taxpayer under an income protection policy are assessable income under subsection 6-5(2) of the ITAA 1997.
Facts
The taxpayer has an income protection insurance policy.
The taxpayer was diagnosed with a terminal illness.
After the taxpayer used all of the available sick leave from their employer, the insurance company commenced the payment of predetermined monthly benefits.
The purpose of the payments was to provide a regular source of income to financially support the taxpayer and their immediate family.
The payment will continue until the earlier of the taxpayer's death or attaining the age of 65.
Reasons for Decision
Subsection 6-5(2) of the 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.
Ordinary income has generally been held to include 3 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 earned; • Are expected; • Are relied upon; and • Have an element of periodicity, recurrence or regularity.
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 (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).
The monthly payments the taxpayer receives are intended to provide financial support for themselves and their family. The income replacement payments replace the salary and wages normally earned, expected and relied upon by the taxpayer. These payments are considered to be ordinary income as they acquire the character of the salary and wages for which they are substituted. The payments are assessable under subsection 6-5(2) of the ITAA 1997.