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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012876674007

Date of advice: 11 September 2015

Ruling

Subject: Income - assessable - insurance policy benefits

Question 1

Is the lump sum 'specific injury' compensation payment you received in 20XX under the terms of your income protection policy assessable income?

Answer

No

This ruling applies for the following period

Year ending 30 June 2015

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You have disability income insurance, specifically an insurance policy with the cover type being disability income standard.

You suffered an injury whilst transferring files from your vehicle in the work carpark to your office.

You required treatment in the form of pain relief medication for the injury.

You received a lump sum payment from your insurance company; the payment was specific injury disability benefit payment covering the period X to Y.

You were not prevented from carrying out work related activities and there was no change in the hours worked.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-1(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 subsection 6-15(1)

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

Reasons for decision

Detailed reasoning

Assessable income consists of ordinary income and statutory income under subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called ordinary income.

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:

The lump sum payment of the Specific injury benefit was not earned by you as it does not directly relate to services performed. Rather the lump sum relates to personal circumstances that have arisen during your life. The payment is a one-off payment paid to you 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.

The lump sum payment of the Specific injury benefit is not considered ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Statutory income

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by specific provisions of the income tax law, are called statutory income.

These specific provisions of the income tax law are listed in section 10-5 of the ITAA 1997, and include the capital gains tax (CGT) provisions.

Taxation Ruling TR 95/35 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. The whole of the settlement amount is thus treated as capital proceeds from a CGT event happening to the taxpayer's 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 suffer personally'. Therefore any capital gain made from the CGT event happening to your right to seek benefits (compensation) under your risk insurance policy is disregarded under paragraph 118-37(1)(b) of the ITAA 1997.

The lump sum payment of the Specific injury benefit that you received under your income protection insurance policy is therefore not statutory income.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount you received is included in your assessable income.

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