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Edited version of your private ruling
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Ruling
Subject: Benefits paid under an insurance policy
Question
Are any of the benefit payments received 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 purchased an insurance policy.
The policy offered cover for different types of events through four optional plans. These plans can be taken individually or in conjunction with each other.
You were diagnosed with a specified sickness as listed in the policy.
You made a claim on the policy which was accepted by the insurer. The insurer made benefit payments over several financial years.
A copy of the policy product disclosure statement (PDS) has been provided.
Premiums are based on the insured's age at entry into the policy; the level of cover applied for and is not income level based.
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 an insurance 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 insurance policy provided benefits in the event of a covered illness/condition only. The insurance product is similar to a trauma cover. The purpose of 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 paid by the trauma cover does not replace earnings lost to the taxpayer.
In your case some of the benefits paid were periodically; this factor alone does not change the character of the payment to one of an income nature. Where the insurance payment is not paid one-off, the amounts are considered as instalments of an ascertained capital lump sum.
The payments received under the policy are capital receipts and are not assessable under section 6-5(2) 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.
The disposal of a taxpayer's right to seek compensation triggers the capital gains tax provisions. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'.
The payments received under the 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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