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Edited version of private ruling

Authorisation Number: 1011804648621

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Ruling

Subject: Trauma insurance payout

Question:

Is the lump sum payment received under your trauma insurance policy assessable as either ordinary income or as a capital gain?

Answer: No.

This ruling applies for the following periods

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You had a trauma insurance policy.

You received a trauma payout from this policy in the 2009-10 financial year as a result of being diagnosed with an illness.

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident 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.

Other characteristics of income that have evolved from case law include receipts that:

In your case, you have not earned the lump sum payment as it does not directly relate to services performed. Rather the lump sum relates to personal circumstances that have arisen as a result of an illness. 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. Capital gains are one form of statutory income.

Taxation Ruling TR 93/35 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.

Your trauma insurance payout is regarded as capital proceeds from a capital gains tax (CGT) event happening to your right to seek compensation.

However, paragraph 118-37(1)(b) 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 suffered. Therefore any capital gain made from your trauma insurance payout is disregarded under paragraph 118-37(1)(b) of the ITAA 1997.

The lump sum payment you received for your illness is not assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. The lump sum is also disregarded as a capital gain 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. Therefore no part of your trauma benefit is included in your assessable income.

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