Edited version of private advice

Authorisation Number: 1051810288097

Date of advice: 15 March 2021

Ruling

Subject: Lump sum - TPD payment

Question 1

Is the lump sum settlement payment you received assessable income?

Answer

No. Your settlement is a result of you making a complaint where entitlement to receive a payment under a Total and Permanent Disablement (TPD) claim was in dispute. It is not a lump sum payment which substitutes for an income stream.

The lump sum payment is a capital receipt and is not ordinary income. Therefore, the amount is not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Is the capital gain you made on receipt of the lump sum settlement payment disregarded?

Answer

Yes. Capital gains tax (CGT) event C2 happened when you signed the Deed of Settlement and Release However, the capital gain you made from the CGT event is disregarded, as the payment you received relates wholly to the personal wrong, injury or illness you have suffered. As such, no part of the lump sum payment is included in your assessable income.

This ruling applies for the following period:

Financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have been diagnosed by a legally qualified medical practitioner as suffering from a permanent medical condition.

You have been unable to return to the duties that you are tertiary qualified for.

You are a member of a complying superannuation fund (Fund). The Fund's trustee entered a group policy of insurance under which the insurer agreed to provide death and total and permanent disablement (TPD) benefits in respect of its members in the event of an 'insured person' meeting certain eligibility requirements. You were listed as an 'insured person' under the policy.

As a result of your medical condition, you made a TPD benefit claim against your Fund's insurer. The insurer notified the Fund in writing of its decision to decline liability of the TPD claim. The Fund then notified you that it had determined to agree with the insurer's decision.

You exercised your rights to have the decision reviewed. The insurer wrote to the Fund notifying it of its decision to maintain its prior decision and the Fund then notified you that it had determined to agree with the insurer.

You engaged the services of a legal firm to represent you and commenced proceedings against the Fund and insurer in the State Court.

Without admission of liability, you and the other parties agreed to settle the TPD claim and proceedings on the terms set out in the Deed of Settlement and Release (the Deed).

Under the Deed you agreed that the proceedings would be dismissed against the Fund and the insurer and you have executed all documents necessary to affect the dismissal, with no order as to costs.

The insurer agreed to pay you a lump sum amount in full and final settlement of any and all claims arising out of or in relation to the TPD claim and proceedings.

You have accepted the offer and the lump sum settlement sum was paid into your legal representative's trust account in the 20XX financial year.

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 104-25

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

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