Edited version of private advice

Authorisation Number: 1052129591748

Date of advice: 15 June 2023

Ruling

Subject: Assessable income- lump sum

Question

Question 1

Is the lump sum payment of $XXXX offered by your insurer assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

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.

The lump sum payment will not be paid to you as compensation for lost salary and wages. Therefore, the payment is not ordinary income and is not assessable under subsection 6-5(2) of the ITAA 1997.

Question 2

Will any capital gain resulting from capital gains tax (CGT) event C2 occurring be disregarded?

Answer

Yes.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens on the ending of the right to seek compensation, that is, the right to take legal action.

You intend to enter into an agreement to accept a settlement payment from your insurer to settle a complaint and dispute. Thus, the relevant asset is the right to seek compensation. It is considered that the amount you will receive is a payment for the ending of this right.

Therefore, CGT event C2 will happen when you accept this payment, and therefore, a capital gain may arise.

However, subsection 118-37(1)(a)(ii) of the ITAA 1997 disregards a capital gain where the amount relates to compensation or damages received for any wrong, injury or illness you suffer personally.

In your case, you experienced ongoing stress caused by a debt that resulted from a lump sum payment paid by your insurer. The amount you will receive from your insurer is considered compensation for the stress that you suffered.

Therefore, any capital gain or capital loss which may arise on acceptance of the settlement payment will be disregarded.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are insured under Organisation B policy held between Organisation C, previously Organisation D (the insurer) and Organisation B.

In August 20XX, you commenced employment with Organisation A. You became a member of Organisation B and obtained income protection cover.

In December 20XX, you ceased working with Organisation A due to health issues.

By 20XX, you and your family were experiencing financial stress due to you not working.

Initially, you were uncertain about lodging a claim with the insurer as you did not believe that your health would allow you to do so, or that your claim would be successful.

In February 20XX, you lodged a claim with the insurer.

You required legal support in lodging your claim and sought assistance from Organisation E.

In June 20XX, the insurer paid you interim benefits for a period between April 20XX to June 20XX.

In November 20XX, the insurer paid you interim benefits for a X year period, up until April 20XX.

In August 20XX the insurer assessed your claim and advised you that a full benefit was to be paid. They then issued you with a lump sum payment for a period between April 20XX to August 20XX.

You continued to receive monthly income protection benefits from the insurer for the remainder of the 20XX-XX income year.

In August 20XX, you confirmed with the insurer that the correct amount of tax had been withheld from the lump sum payment.

At the time of receiving the lump sum payment, you were in poor health.

In October and November 20XX, you spent the money and intended to recover from your health issues.

In December 20XX, you received a notice from Organisation F for the 20XX-XX income year which detailed a debt.

In February 20XX, you received a notice from Organisation F which reduced your debt.

Your debt has caused you to experience ongoing stress.

You attempted to negotiate the amount of debt with Organisation F, however, you were unsuccessful in having the full amount waived.

In November 20XX, you made a complaint to the insurer indicating Organisation F had determined the insurer had made an error on the lump sum payment you received.

In February 20XX, you received a complaint response from the insurer and the outcome was not to your satisfaction.

In February 20XX, you lodged a complaint with Organisation G regarding the complaint response you received from the insurer. You provided a copy of the complaint to Organisation G.

The insurer offered you a lump sum payment of $XXXX in full and final settlement of the complaint and the dispute under a Deed Poll.

You provided a copy of the Deed Poll from the insurer.

The $XXXX offered by the insurer represents approximately half of the debt.

The payment offered was not a payment from an employer, nor was it a replacement salary payment from an insurer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-37

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