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This edited version has been archived due to the length of time since original publication.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: 1013100732977

Date of advice: 29 September 2016

Ruling

Subject: Assessable income - insurance

Question

Is the lump sum specific Illness benefit that you received assessable income?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2017

The scheme commences on:

July 2016

Relevant facts and circumstances

The organisation you work for holds a Group Salary Continuance Plan policy with an investment insurance superannuation (the policy).

The policy provides for payment of a specific illness benefit in the event of an illness of a person engaged by the policy owner.

Under the terms of the policy the agreed value cover for the specific illness benefit will be equal to XX times the monthly benefit applied from the time the insured suffered the illness.

The monthly benefit payable is $XY,000.

The specific illness benefit is payable regardless of whether the insured member is still receiving their normal remuneration from working.

You suffered a specific illness event as specified under the policy.

In the financial year you received a specific illness benefit amount as a lump sum payment.

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

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 illness 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 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 with personal services performed.

The lump sum payment of the specific illness 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.

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 a CGT event that happened in relation to your receipt of compensation under the insurance policy is disregarded under paragraph 118-37(1)(b) of the ITAA 1997.

The lump sum payment of the specific illness benefit that you received 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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