Extending the capital gains tax exemption for certain compensation payments and insurance policies

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.

Administrative treatment

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

For more information about these measures, refer to:

• Proposals paper - Minor Amendments to the capital gains tax law issued on 27 June 2012. Submissions close on Wednesday 25 July 2012.
• 2012-13 Federal Budget Paper No 2 (PDF 1.4MB) page 20
• Proposals paper - Minor amendments to the capital gains tax law issued on 27 May 2011.
• 2011-12 Federal Budget Paper No 2 (PDF 1.2MB) page 18.

Our commitment to you

We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice.

Copyright

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products)