Edited version of private advice

Authorisation Number: 1051772724229

Date of advice: 30 October 2020

Ruling

Subject: Lump sum payment - insurance benefit payment

Question 1

Is your lump sum payment assessable as ordinary income?

Answer

No

Question 2

Is any capital gain arising from the lump sum payment included in your assessable income?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You were employed.

You were insured under an insurance policy which was provided by your former employer.

You became unwell in XXXX and were unable to work.

You received monthly income protection benefits under the policy.

An additional benefit was available under the policy if you could return to work following the completion of a specific program approved by the insurer, and you remained in full-time employment for a specified period of time.

You attended an approved program to assist you to return to work and remained in full-time paid employment for the requisite time.

As you had satisfied the conditions for the benefit you received it as a lump sum payment.

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 102-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 paragraph 118-300(1)

Income Tax Assessment Act 1997 paragraph 118-37(1)(a)

Reasons for decision

Question 1

Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

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:

·         are earned

·         are expected

·         are relied upon; and

·         have an element of periodicity, recurrence or regularity.

Some examples of ordinary income include salary and wages and income protection payments.

In your case you received a lump sum payment from an insurance company upon completion of an approved program to assist you to return to work. You are not considered to have been paid to undertake the program such that the lump sum payment was income from rendering personal services. The lump sum payment is also not income from property or income from carrying on a business, nor is it intended to replace income.

Although the lump sum payment can be said to be expected and relied upon, this expectation arises from being insured under the policy, rather than from a relationship within which personal services are performed. In addition, the benefit is paid in a lump sum so it does not have an element of periodicity, recurrence or regularity.

Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Question 2

Amounts that are not ordinary income, but are included in your assessable income by another provision are called statutory income (section 6-10 of the ITAA 1997).

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is section 102-5 (capital gains).

Your assessable income includes your net capital gain for the income year (subsection 102-5(1) of the ITAA 1997). You make a capital gain (or loss) as a result of a CGT event happening (section 102-20).

CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being redeemed, released, discharged or surrendered (subsection 104-25(1) of the ITAA 1997). The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends (subsection 104-25(2)).

A CGT asset is any kind of property or a legal or equitable right that is not property (section 108-5 of the ITAA 1997).

In your case, your right to receive the lump sum payment was an intangible CGT asset and your ownership of that asset ended when you received the lump sum benefit. At that time CGT event C2 happened and you made a capital gain. You acquired this right when you satisfied the conditions to be entitled to the lump sum benefit.

In some instances a capital gain may be reduced or disregarded. For example, paragraph

118-300(1) of the ITAA 1997 allows a capital gain to be disregarded in certain circumstances where the CGT asset is an interest in rights under an insurance policy. These circumstances include general insurance policies where property is insured and life insurance policies. However, in your case, you were insured under an insurance policy which offered various benefits relating to becoming ill or being injured at work. As the purpose of the policy is to ensure employees are covered in the event they are unable to work due to an accident or illness, this provision has no application.

A capital gain is also disregarded if it is made from a CGT event relating to compensation or damages you receive for any wrong, injury or illness you suffer in your occupation or you suffer personally (paragraph 118-37(1)(a) of the ITAA 1997). The lump sum benefit you received was a specific benefit paid under an insurance policy. Whilst the payment was indirectly related to your illness or injury, it was not paid for your illness or injury, rather the payment was made to you once you had met the relevant criteria to receive the payment in accordance with the terms of the policy. As such, your capital gain is not disregarded under this provision.

As you did not hold the right to receive the lump sum benefit for more than 12 months the capital gain you made is not a discount capital gain. As such, the whole amount of the lump sum benefit is included in your assessable income as a net capital gain.

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