ATO Interpretative Decision

ATO ID 2002/244 (Withdrawn)

Income Tax

• This ATO ID is superseded by ATO ID 2004/942
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a lump sum payment received by a taxpayer under the trauma terms of an income protection policy, assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or as statutory income under section 6-10 of the ITAA 1997?

Decision

No. A lump sum payment received by the taxpayer under the trauma terms of an income protection policy is not assessable under section 6-5 of the ITAA 1997 as it is not ordinary income and it is not statutory income under section 6-10 of the ITAA 1997 and it is disregarded from Capital Gains Tax (CGT) by the operation of paragraph 118-37(1)(b) of the ITAA 1997.

Facts

The taxpayer has an income protection insurance policy.

The taxpayer was diagnosed with a terminal illness. In accordance with the terms of the insurance policy, the insurance company on diagnosis of the terminal illness paid the taxpayer a lump sum amount in respect of the illness.

The lump sum payment is equal to 6 months of a predetermined monthly benefit, being payable once only.

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;

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Are expected;

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Are relied upon; and

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Have an element of periodicity, recurrence or regularity.

The lump sum payment is not earned by the taxpayer as it does not directly relate to services performed. Rather the lump sum relates to personal circumstances that have arisen during the taxpayer's life. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the investment in insurance, rather than from a relationship with personal services performed. Thus, the lump sum payment is not considered ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Taxation Ruling TR 95/35 indicates that settlement of a personal injuries claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the losses arising from the injury suffered.

The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards the payments or receipts where the amount relates to compensation or damages a taxpayer received for any wrong, injury or illness a taxpayer suffered.

The lump sum payment received by the taxpayer for trauma is not assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. The lump sum is also disregarded from CGT by the operation of paragraph 118-37(1)(b) of the ITAA 1997. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income.

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(2)
   subsection 6-15(1)
   section 6-20
   paragraph 118-37(1)(b)

Related Public Rulings (including Determinations)
TR 95/35

Keywords
Capital gains tax
Lump sum payments
Compensation income
Damages

Business Line:  Small Business/Individual Taxpayers

Date of publication:  22 March 2002

ISSN: 1445-2782