Edited version of your private ruling

Authorisation Number: 1012566186283

Ruling

Subject: Assessable income

Question

Are the lump-sum payments that you received under the terms of your insurance policy included in your assessable?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You purchased an insurance policy which paid a daily benefit.

You were diagnosed with a specified sickness as listed in the policy.

You made a claim under the policy and were paid a benefit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

Reasons for decision

Summary

The lump sum benefits that you received under the terms of your insurance policy are not ordinary or statutory income and are therefore not assessable income.

Detailed reasoning

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 lump sum payments of benefits were not earned by you as they do not directly relate to services performed. Rather the lump sum relates to personal circumstances that have arisen during your life. The payments are also one-off payments and thus do 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.

The payments you 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 you received under the 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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