In the 2011-12 Federal Budget, the government announced it will ensure gains and losses arising from life insurance policies that are generally exempted from capital gains tax (CGT) are not taxed under the income tax provisions. This will be done by removing the exception to the 'CGT primary code' rule for such gains and losses.
This measure will remove uncertainty on how income tax applies to compensation or damages payments received under life insurance policies.
In the 2012-13 Federal Budget, the government announced it will make minor extensions to the CGT exemptions for certain compensation payments and insurance policies.
This measure will disregard CGT consequences where a taxpayer receives compensation, damages or certain insurance proceeds indirectly through a trust. This will ensure that the taxpayer has the same CGT outcome as a taxpayer who receives such proceeds directly. It will also ensure that insurance policies owned by super funds that were treated as being CGT exempt prior to the 2011-12 Budget changes to compensation payments and insurance policies continue to be CGT exempt.
These changes will apply to CGT events happening in the 2005-06 income year and later income years.
We will accept tax returns as lodged during the period up until the proposed law change is passed by parliament. Past year assessments will not be reviewed until the outcome of the proposed amendment is known.
After the new law is enacted, taxpayers will need to review their positions back to the 2005-06 income year:
- Those taxpayers who treated relevant CGT events in accordance with the changes do not need to do anything more.
- Those taxpayers who did not treat relevant CGT events in accordance with the changes can seek amendments and
- if a reduction in liability results, interest on overpayments will be paid
- if an increase in liability results, no tax shortfall penalties will be applied and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change - in addition, any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend assessments within a reasonable timeframe after enactment.
For more information about these measures, refer to:
Last Modified: Friday, 27 July 2012