1011742171110 | Legal database

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Edited version of private ruling

Authorisation Number: 1011742171110

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Ruling

Subject: Income from insurance policy

Question

Is the income received as a result of the payout of your life and total and permanent disability insurance policy assessable income?

Answer

No.

This ruling applies for the following periods

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts and circumstances

Your employer took out a group insurance policy for life and total and permanent disability for you and others in the company.

Your employer's intention was that you and your family would benefit from the policy.

You have recently been diagnosed with a terminal illness.

Ownership of the policy will be transferred to you with the issue of a new policy in your name.

Your estate will be the beneficiary of the new policy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10,

Income Tax Assessment Act 1997 Section 6-5(2) and

Income Tax Assessment Act 1997 Section 104-5.

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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 three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

The payment of a life and total and permanent disability insurance policy does not fall within the three categories and is not considered to be ordinary income.

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.

The surrender or discharge of a sickness or life insurance policy gives rise to a CGT event (section 104-5 of the ITAA 1997 - CGT Event C2). However, subsection 118-300(1) of the ITAA 1997 provides that if a CGT event happens to a life insurance policy and the taxpayer is the original beneficial owner of the policy, the amount received as a result of the event is disregarded.

The original beneficial owner of the policy and the surrender of the policy constitute a CGT event. The lump sum payment received as a result of the surrender of the insurance policy is disregarded and therefore excluded from assessable income.

In your case the lump sum payment received is not assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. The lump sum payment is also disregarded by the operation of subsection 118-300(1) 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 and will not therefore be subject to income tax.

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