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ATO Interpretative Decision

ATO ID 2004/662

Income Tax
Assessable income: disability benefits paid under a mortgage protection policy

FOI status: may be released
Status of this decision: Decision Current

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Issue

Are disability benefits, paid under the terms of a mortgage protection policy in the event the taxpayer is unable to perform their usual occupation due to sickness, injury or disease, included in the taxpayer's assessable income as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Disability benefits, paid under the terms of a mortgage protection policy in the event the taxpayer is unable to perform their usual occupation due to sickness, injury or disease, are included in the taxpayer's assessable income as ordinary income under section 6-5 of the ITAA 1997.

Facts

The taxpayer has a mortgage protection policy in relation to a housing loan.

Approval of the taxpayer's loan was not associated with or conditional upon the purchase of the mortgage protection policy.

The policy provides that the insurer will:

·
 meet the taxpayer's loan repayments in the event the taxpayer is unable to meet their repayment commitments as a result of involuntary unemployment or disability due to sickness, injury or disease (disability benefit), and/or
·
 pay the outstanding balance on the taxpayer's loan at the date of death.

The policy also provides that the insurer will pay any disability benefits claimed on the policy directly to the financier to be applied against the loan.

The taxpayer is unable to perform their usual occupation due to sickness.

In accordance with the terms of the mortgage protection policy, the insurance company pays the financier the monthly disability benefit as set out in the policy.

Reasons for Decision

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

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 and wages for example are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted: Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts: Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433.

The monthly disability benefit is intended to provide financial support and assistance for the taxpayer and their family. While not earned, the disability benefit is expected and relied upon by the taxpayer, and being paid monthly, has an element of recurrence and regularity. In certain defined events the disability benefit will effectively replace the taxpayer's income from salary and wages.

Accordingly, the disability benefit can be characterised as income according to ordinary concepts and is therefore included as assessable income within the terms of section 6-5 of the ITAA 1997 when derived.

Taxation Ruling TR 98/1 provides that under the receipts method, income is derived when it is received either actually or constructively under subsection 6-5(4) of the ITAA 1997.

Subsection 6-5(4) of the ITAA 1997 provides that in working out whether a taxpayer has derived an amount of ordinary income and when it is derived, a taxpayer is taken to have received the amount when it is applied or dealt with in any way on their behalf or as directed by them.

The Explanatory Memorandum to the Income Tax Assessment Bill 1996 confirms that an amount is treated as having been received under subsection 6-5(4) of the ITAA 1997 as soon as the taxpayer gets a benefit from it.

Subsection 6-5(4) of the ITAA 1997 therefore applies, such that the taxpayer will be taken to have received the disability benefit as soon as a payment is made to the financier as the taxpayer will have received a benefit from the payment being applied or dealt with on their behalf. As such, the taxpayer will have derived the disability benefit for the purposes of section 6-5 of the ITAA 1997.

Accordingly, a disability benefit paid under the terms of a mortgage protection policy in the event the taxpayer is unable to perform their usual occupation due to sickness, injury or disease is included in the taxpayer's assessable income under section 6-5 of the ITAA 1997.

Date of decision: 3 June 2004

Year of income:Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(4)

Case References:
Federal Commissioner of Taxation v. Dixon
   (1952) 86 CLR 540
   (1952) 5 AITR 443
   (1952) 10 ATD 82

Federal Commissioner of Taxation v. Inkster
   (1989) 24 FCR 53
   (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

Related Public Rulings (including Determinations)
Taxation Ruling TR 98/1

Related ATO Interpretative Decisions
ATO ID 2002/175
ATO ID 2002/540
ATO ID 2004/661

Other References
Explanatory Memorandum to the Income Tax Assessment Bill 1996.

Keywords
Income
Insurance income

Date of publication: 13 August 2004

ISSN: 1445-2782

 


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