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Edited version of your private ruling
Authorisation Number: 1012324583117
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Ruling
Subject: Trauma benefits
Question
Are the trauma benefit payments you receive under an insurance policy assessable as either ordinary income or as a capital gain?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commences on
1 July 2010
Relevant facts and circumstances
You took out an insurance policy.
You were diagnosed with an illness.
In accordance with the terms of your insurance policy, a trauma benefit was payable on the diagnosis of this illness.
The trauma benefit is paid monthly.
Your policy allows for the trauma benefit to be paid only once during the currency of the benefit.
You have provided a copy of the terms and conditions of the policy.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Subsection 6-15(1)
Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)
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.
In order to determine the taxation treatment of a trauma benefit payment, the nature of the payment must be examined, as a compensation amount generally bears the character of that which it is designed to replace. (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82).
The purpose of the trauma cover is to provide a capital amount to the insured if the insured suffers a specified medical condition as diagnosed and certified by a medical practitioner and agreed to by the insurer. The benefit does not replace earnings lost by the taxpayer.
In your case the trauma benefit you received has been paid periodically, this factor alone does not change the character of the payment to one of an income nature. Where the trauma payment is not paid one-off, the amounts are considered as instalments of an ascertained capital lump sum.
The payments you have received under the trauma benefit are capital receipts, and are not assessable under section 6-5 of the ITAA 1997 as ordinary income.
Capital Gains Tax (CGT)
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 person's right of indemnity under a policy of insurance falls within the definition of a right to seek compensation.
Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling provides that an insured person'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 CGT event happening to your right to seek compensation.
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 received for any wrong, injury or illness you suffered.
The trauma benefit payments you received under your insurance policy are not assessable under subsection 6-5(2) of the ITAA 1997 as they are not ordinary income. The payments are 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.
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