Edited version of your written advice

Authorisation Number: 1051255557828

Date of advice: 31 August 2017

Ruling

Subject: Insurance payments

Question 1

Is the lump sum payment received from XXX1 assessable income?

Answer

No.

Question 2

Is the lump sum payment received from XXX2 assessable income?

Answer

No.

Question 3

Are you entitled to claim a full deduction for the income protection policies?

Answer

No.

Question 4

Are you entitled to claim a partial deduction for the income protection policies?

Answer

Yes.

Question 5

Are the amounts received as a refund, which represent your premiums paid on your insurance cover, assessable as ordinary income?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

In XXXX you were diagnosed with a critical condition.

You have two income protection policies.

The XXX1 policy is for income protection which covers you for other benefits, including trauma benefit. This benefit is paid when you suffer a condition which is diagnosed based on clinical findings or reports. You are the only person insured on this policy.

The XXX2 policy is also for income protection which covers you for other benefits, including critical conditions benefit. This benefit is also paid when you suffer a condition which is diagnosed based on clinical findings or reports. You are the only person insured on this policy.

In accordance with the terms of the insurance policies, the insurance companies on diagnosis of the terminal illness paid you a lump sum amount.

Both lump sum payments received are equal to six (6) months of a predetermined monthly benefit, being payable only once.

You would have received these lump sum payments even if you did not stop working.

You also received payments which represent refunds of premiums paid on the income protection policies.

You have claimed a deduction in full for your insurance fees relating to your income protection policies.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 20-20(2)

Income Tax Assessment Act 1997 Section 118-37(1)

Reasons for decision

Insurance payments

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

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:

● are earned

● are expected

● are relied upon, and

● have an element of periodicity, recurrence or regularity.

The insurance payments you have received do not meet the characteristics of ordinary income, and therefore are not assessable under subsection 6-5(2) of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income also includes statutory income. Statutory income is amounts that are not ordinary income but are included in assessable income by another provision.

Amounts received in respect of an illness which are not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

However, paragraph 118-37(1)(a) 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. As the compensation payments are for an illness you have suffered, it is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. Consequently the compensation payment is 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.

It is accepted that the payments for compensation have been paid to you because you have been diagnosed with an illness. As the lump sum payments were paid only once and do not have the characteristics of being income, the lump sum payments are not replacing an amount that if received, would have been income.

The lump sum payments received in relation to your illness from the insurers are neither ordinary income nor statutory income; therefore it does not form part of your assessable income and is not subject to tax.

Deduction for insurance premiums

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The Commissioner takes the view that a self-employed taxpayer is entitled to a deduction under Section 8-1 of the ITAA 1997 for sickness/accident premiums paid under an insurance policy providing the taxpayer with benefits of an income nature during a period of disablement (commonly called an income protection policy).

However, where an insurance policy provides both revenue benefits (eg for loss of earnings) and capital or private benefits (eg for death or loss of limb), the premiums may need to be apportioned between the income and non-income components.

It is clear from the above decision that both insurance policies provided an income or revenue benefit and a capital benefit. Therefore you will need to apportion the premium to reflect this dual purpose when calculating your allowable deductions. An apportionment can be obtained by requesting an actuarial certificate from the insurer. If the premiums cannot be apportioned, a deduction may be disallowed in full.

Therefore, you are entitled to a deduction under section 8-1 of the ITAA 1997 for premiums paid under an income protection policy that provides for an indemnity against loss of income if you are unable to work due to sickness or injury. However, where the policy provides for benefits of an income and capital nature, only that part of the premium attributable to the income benefit is deductible.

Refund of insurance premiums

Income protection

Recoupment

Subsection 20-20(2) of the ITAA 1997 provides that an amount you have received as a recoupment of a loss or outgoing is an assessable recoupment if:

● you received the amount by way of insurance or indemnity, and

● you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it in an earlier income year, under any provision of this Act.

In your case you have received amounts representing a refund of the premium fees you had incurred and previously claimed as deductions. You are therefore required to include these amounts as an assessable recoupment.

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