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The Federal Court (Mansfield J) has upheld the Commissioner's assessment which denied the taxpayer a deduction for business losses against income derived from a "personal income protection insurance policy" (PIP policy). The deduction was denied under Div 35 of  ITAA 1997 headed "Deferral of losses from non-commercial business activities". The Court held that the payments under the PIP policy were unrelated to the taxpayer's business as a financial planner. The Court said, at para 50:

"They [the payments under the PIP policy] were to substitute for the income he may have earned in the business but for his partial disability. But there was no element of the business to which they were connected. Their only relationship to the business is that eligibility for the payments depended on the fact of ongoing partial incapacity to conduct the business as Mr Watson had previously done, and that the PIP policy quantified the contractual entitlement by reference to Mr Watson’s income from the business, adjusted as agreed in the PIP policy. Those are merely events which the PIP policy was expressed to operate upon. The relevant payments under the PIP policy, however, had no causative connection with the business so that they could be regarded as income from the business or from the business activity."

Watson v FCT [2008] FCA 1173 (Federal Court, Mansfield J, 8 August 2008).

For a copy of the decision, go here

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