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Edited version of your written advice
Authorisation Number: 1013131560536
Date of advice: 29 November 2016
Ruling
Subject: Lump sum trauma payment
Question 1
Is any part of your lump sum trauma payment assessable income?
Answer
No.
Question 2
Is there a capital gain with the trauma payment you received?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
Your employer pays and provides Group Income Protection insurance for their employees.
A trauma benefit can be paid under this policy. This is a once off lump sum payment for persons insured under the insurance policy whom are diagnosed with a specified condition.
You were diagnosed with a specified condition.
That condition is listed as a trauma covered by the Trauma benefit.
As per the policy you were paid a lump sum equal to three times your monthly salary.
Trauma benefit will only be paid once for an insured person. Once the benefit is paid, Trauma benefit will cease for the insured persons.
You were entitled to a gross amount of an amount however the insurer withheld tax. Therefore your net payment was an amount.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 118-37
Further issues for you to consider
You have had tax withheld from your payment by the insurance company and the Commissioner deems this payment non-assessable income.
Therefore in order to have the tax refunded to you it is recommended that you:
● First contact the insurer and advise them that the payment is non-assessable income and request a refund of the tax that was withheld. If the insurer has not forwarded the tax to the ATO yet they may be able to refund this to you directly.
● If the insurer has passed the tax withheld onto the ATO, you can declare this on your income tax return to ensure you have this amount refunded.
Income tax return instructions if the insurer has passed the tax withheld to the ATO.
● Enter a $0 amount in Income label 1 and then enter the amount of tax that was withheld from this payment.
● You must then include a copy of this private ruling and the authorisation number in the additional information schedule of the income tax return to evidence why you have declared no income but tax withheld.
Reasons for decision
Subsection 6-5(2) of the ITAA 1997 states that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Ordinary income is income according to ordinary concepts which is not specifically defined in the legislation.
However, characteristics of ordinary income that have evolved from case law include receipts that:
● are earned
● are expected
● are relied upon, and
● have an element of periodicity, recurrence or regularity.
Payment for personal services, whether received in the capacity of an employee or otherwise in connection with employment or other personal services income is income according to ordinary concepts. Similarly, any payment (for example compensation) to replace income is also considered to be income for ordinary concepts.
You have received a lump sum payment for personal illness and not for loss of income.
The lump sum payment received is therefore not income according to ordinary concepts and not assessable under section 6-5 of the ITAA 1997.
Where an amount of income is not ordinary income it may be included in a taxpayer's assessable income under section 6-10 of the ITAA 1997. This income is called statutory income and is made assessable by a specific provision of the taxation legislation.
Section 118-37 of the ITAA 1997 specifically excludes compensation or damages received for any wrong, injury or illness you or a relative suffers personally. Thus, the lump sum payment you received is not statutory income and no capital gain will occur.
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