ATO Interpretative Decision

ATO ID 2004/313 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as the ATO view on this matter is now dealt with in Draft Taxation Determination 2006/D36
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the proceeds from a continuous disability policy exempted under section 118-37, or section 118-300 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Provided the other conditions of the section are met, the proceeds from a continuous disability policy will be exempted under section 118-300 of the ITAA 1997 if the payment is made because of the death of the insured. If the payment is made because of injury, disability or illness, the proceeds may be exempted under section 118-37 of the ITAA 1997.

Facts

The taxpayer is the beneficial owner of a continuous disability policy issued by a life insurance company.

The taxpayer has received proceeds from the policy.

Reasons for Decision

Section 118-300 of the ITAA 1997 exempts certain capital gains which relate to a person's rights under a life insurance policy.

For the purposes of subsection 995-1 of the ITAA 1997, a 'continuous disability policy' takes the meaning given to it by section 9A of the Life Insurance Act 1995. The section states that:

9A(1) Subject to this section, a continuous disability policy is a contract of insurance:

(a)

that is, by its terms, to be of more than 3 years' duration; and

(b)

under which a benefit is payable in the event of:

(i)

the death, by accident or by some other cause stated in the contract, of the person whose life is insured (the insured); or

(ii)

injury to, or disability of, the insured as a result of accident or sickness; or

(iii)

the insured being found to have a stated condition or disease.

Therefore, a continuous disability policy is effectively a life insurance policy with additional benefits. The policy has all the rights and benefits of a life insurance policy. In order to obtain the extra benefits, an annual premium is payable in addition to the annual premium payable for the life insurance component. The additional benefits, may, for example, take the form of a lump sum payment on the permanent disablement of the insured. The nature of each additional benefit will depend upon the terms of each particular individual policy. For an analysis of the meaning of continuous disability policy see National Mutual Life Association of Australasia Limited v. FCT (1959) 102 CLR 29; (1959) 11 ATD 523; (1959) 7 AITR 368, and more recently, AMP Life Limited v. Commissioner of State Revenue (2003) 53 ATR 54; 2003 ATC 4526.

For proceeds under a continuous disability policy to be exempt under items 3 to 6 in the table in section 118-300 of the ITAA 1997, the policy must be 'a policy of insurance on the life of an individual' . The term 'policy of insurance on the life of an individual' is not defined in the ITAA 1997 and must take its commonly understood meaning. A policy will be regarded as a policy on the life of an individual if there is a payment of a given sum of money upon the happening of an event that is contingent on the duration of human life, in consideration for a payment of premiums by the insured. A 'policy of insurance on the life of an individual' does not take the extended definition under section 995-1 of the ITAA 1997 of 'life insurance policy' (ATO ID 2004/312)

If a payment under a continuous disability policy is made because of the death of the insured the proceeds will be exempted under section 118-300 of the ITAA 1997. The payment is made as a result of an event that is contingent on the duration of human life.

Section 118-37 of the ITAA 1997 disregards capital gains arising from the receipt of compensation paid as a result of a wrong, injury or illness suffered by the taxpayer. Payments made under a continuous disability policy which are in the nature compensation for injury, accident or illness will be exempted under section 118-37 of the ITAA 1997. These are additional benefits payable under the policy where payment is not contingent upon duration of human life

Note 1: If periodical or lump sum payments made under a continuous disability policy are intended to replace foregone income, the receipts may be assessable as ordinary income under section 6-5 of the ITAA 1997 (FC of T v. DP Smith 81 ATC 4114; (1981) 147 CLR 578; (1981) 11 ATR 538).

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 118-37
   section 118-300
   section 995-1

Case References:
AMP Life Limited v. Commissioner of State Revenue
   (2003) 53 ATR 54
   2003 ATC 4526

Related ATO Interpretative Decisions
ATO ID 2004/312

Keywords
Capital gains tax
CGT capital proceeds
CGT exemptions
Life insurance policies

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  2 April 2004

ISSN: 1445-2782