Disclaimer
This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1013008025840

Date of advice: 11 May 2016

Ruling

Subject: Refund of contributions

Question 1

Is the return of contributions payment you receive assessable as ordinary income?

Answer

No.

Question 2

Is the return of contributions payment you receive assessable as a capital gain?

Answer

Yes.

Question 3

Do you qualify for the 50% capital gains tax (CGT) discount?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You were a member of a mutual benefit fund for an income protection insurance policy.

Your employer would reimburse a portion of the annual premium and the balance has been claimed as a tax deduction.

You no longer qualified to be a member of the mutual benefit fund under this policy and the policy was therefore terminated.

You were paid a return of contributions payment pursuant to the rules of the mutual benefit fund.

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 Section 104-25

Income Tax Assessment Act 1997 Subsection 110-45(1B)

Income Tax Assessment Act 1997 Section 115-100

Reasons for decision

Summary

The return of contributions payment you received is assessable as a capital gain. As you acquired the policy and associated enforceable rights more than 12 months before you received the payment, you are eligible to discount the capital gain by 50%.

Detailed reasons

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.

Ordinary income has generally been held to include 3 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 return of contributions payment you received from the insurance policy does not relate to personal services, property, or the carrying on of a business. The lump sum more correctly relates your personal circumstances. 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 within which personal services are performed. Thus, the lump sum payment is not 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, and are also included in assessable income. Gains from CGT events are assessable as statutory income.

According to section 104-25 of the ITAA 1997, CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because it is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, forfeited or expired.

If you enter into a contract that results in the asset ending, the time of CGT event C2 is when you enter into that contract. If there is no such contract, CGT event C2 happens when the asset comes to an end.

You make a capital gain from CGT event C2 if the capital proceeds from the asset ending are more than its cost base. If the capital proceeds are less than the reduced cost base of the asset, a capital loss is made.

Subsection 110-45(1B) of the ITAA 1997 states that expenditure does not form part of the second or third element of the cost base of a CGT asset to the extent that you have deducted or can deduct it.

In your case, you received a refund of contributions payment following the termination of your membership in the mutual benefit fund. As a member of the fund, you had a right to enforce contractual obligations, that is, the payment of benefits under the fund's policies. This right is a CGT asset for tax purposes.

Therefore, when the right was terminated and you received the return payment, CGT event C2 occurred. Consequently the payment will be assessable under section 6-10 of the ITAA 1997 as a capital gain. As you have claimed a deduction for the premiums paid they will not form part of the cost base.

In certain circumstances, you may be eligible to reduce the amount of tax payable on a capital gain.

To be eligible for the discount on a capital gain you must:

Section 115-100 of the ITAA 1997 states that the discount rate applicable to a capital gain made by an individual is 50%. As you acquired the policy more than 12 months before the CGT occurred and satisfy the other conditions for a discount capital gain, you are eligible for the 50% CGT discount on the capital gain made from the termination of your policy.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).