ATO Interpretative Decision

ATO ID 2004/942 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. Guidance on the view contained in this ATO ID can be found in Amounts not included as income (QC 31936).
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Issue

Is a lump sum payment received by a taxpayer under the trauma terms of an income protection policy, assessable under section 6-5 or section 102-5 of the Income Tax Assessment Act 1997 (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 or section 102-5 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

•

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.

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling provides that an insured's right of indemnity under a policy of insurance falls within the definition of a right to seek compensation.

The whole of the settlement amount is thus treated as capital proceeds from a capital gains tax (CGT) event (CGT event C2) happening to the taxpayer's right to seek compensation.

However, subparagraph 118-37(1)(a)(ii) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you or your relative suffers personally'. Therefore any capital gain made from the CGT event happening to the taxpayer's right to seek compensation is disregarded under subparagraph 118-37(1)(a)(ii). It is thus not statutory income.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount received is included in the taxpayer's assessable income.

Amendment History

Year of income:  30 June 2005

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

Related Public Rulings (including Determinations)
Taxation Ruling TR 95/35

Keywords
Capital gains tax
Lump sum payments
Compensation income

Business Line:  Small Business/Individual Taxpayers

Date of publication:  26 November 2004

ISSN: 1445-2782