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This edited version has been archived due to the length of time since original publication.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: 1051293581531

Date of advice: 10 October 2017

Ruling

Subject: Assessability of the proceeds of trauma insurance

Question 1

Is your payout of trauma insurance proceeds assessable?

Answer

No.

Question 2

Are the trauma insurance premiums you have paid deductible?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You have trauma insurance which is linked to your life insurance.

In late 20XX you suffered from a medical issue.

The medical issue was not suffered at work and, therefore, not covered by Workcover.

Your insurer has paid you proceeds of the trauma insurance policy as a result of your medical issue.

You have never claimed a deduction on your tax return for your trauma insurance premiums.

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 8-1

Income Tax Assessment Act 1936 Subsection 51(1)

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

Reasons for decision

Question 1

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Other characteristics of income that have evolved from case law include receipts that:

In your case the payment you received was an insurance payment for trauma under a trauma life insurance policy. In accordance with paragraph 2 of Taxation Determination TD 95/41:

The payment does not have the characteristics of ordinary income and was not earned by you and did not relate to services performed. The payment is also a one-off payment and 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 suffering resulting from a medical condition.

Therefore the payment is not income according to ordinary concepts and is not assessable under section 6-5 of the ITAA 1997.

Capital Gains Tax

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.

Receipt of a lump sum payment may give rise to a capital gain (statutory income). However paragraph 118-37(1)(b) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness.

In your case, the payment was made to you under a trauma insurance policy, and as such the payment will be exempt from capital gains tax under paragraph 118-37(1)(b) of the ITAA 1997.

Question 2

Detailed Reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or 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.

In Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431, the Court established that, for a loss or outgoing to be an allowable deduction, there must be a nexus between the outgoing and the assessable income so that the expenditure is incidental and relevant to the taxpayer's income-producing or business operations.

The Full High Court in Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; (1981) 11 ATR 538; 81 ATC 4114, allowed a deduction for premiums paid to secure a monthly indemnity against the income loss arising from the inability to earn. It was held that there was sufficient connection between the purchase of the insurance cover against the loss of the ability to earn and the consequent earning of assessable income, and the outgoing was not of a capital, private or domestic nature. The deduction was allowed under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) (the equivalent of section 8-1 of the ITAA 1997).

Tax Determination TD 95/41 states that the purpose of trauma insurance is to provide a capital amount to the insured person if they suffer a specified medical condition. The policy does not replace any loss of income.

In your case, you have taken out a life insurance policy which consists of trauma cover. If you suffer a trauma as specified in your policy you will receive payments to the sum as shown in your policy. As the trauma part of the policy does not replace any loss of income it is not an allowable deduction under section 8-1 of the ITAA 1997.

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