Edited version of private advice

Authorisation Number: 1052391600470

Date of advice: 8 May 2025

Ruling

Subject: Assessable income

Question 1

Will payment of the insurance proceeds to you as the insurance policy owner result in a CGT event occurring under part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Does section 118-37 of the ITAA 1997 apply to disregard the capital gain?

Answer

No.

Question 3

Does the 50% general CGT discount contained in Division 115 of the ITAA 1997 apply to reduce the capital gain?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

Company Z carries on a services business.

You, through a Discretionary Trust, acquired an interest in the business several years ago, from a Discretionary Trust associated with Individual 3, who was an owner of the business at the time.

A life policy with a TPD option ("TPD") was taken out by you as the Policy Owner over Individual 2 as the Person Insured ("Policy"); and a life policy with a TPD option was taken out by Individual 2 as the Policy Owner over you as the Person Insured, (both policies collectively referred to as "Cross Insurance").

Under the terms of the TPD conditions of the Policy, if the insured person was totally and permanently disabled, the insurer was to pay the TPD benefit.

You are not related to individual 2.

Your intention regarding the Cross Insurance was that the proceeds were to be paid from the policy owner to the person insured in return for the person insured traas set out in a. and b. below in relation to the policy you took out over Individual 2 (and vice versa in relation to the policy that Individual 2 took out over you):

a              if Individual 2 died or became permanently disabled, the insurance proceeds would be paid to you;

b              You would then pay the insurance proceeds to Individual 2 and Individual 2 would transfer his interest in the business to you.

An authorised agent organised the Policy and Cross Insurance. That agent had assisted Individual 2 and Individual 3 (while Individual 3 was an owner of the business) enter similar insurance arrangements between them.

The Policy was executed by you and the insurer in the year following the acquisition of the business.

The policy was renewed each year thereafter on the policy anniversary date.

In a recent year, the Policy was once again renewed for the forthcoming year.

In the year following the renewal of the policy Individual 2 became permanently disabled, for the purposes of the terms of the Policy.

Individual 2 was working in the business at the time.

You received insurance proceeds upon payout of the Policy, as the insurer accepted that Individual 2's medical condition satisfied the TPD payout conditions of the Policy.

You were paid a sum including a refund for premiums paid since Individual 2 became permanently disabled.

You did not execute a written contract establishing the terms of the arrangement.

You did not execute a trust deed relating to the arrangement and you have no other documentation or evidence to indicate the establishment of a trust between you and Individual 2.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Subdivision 115-A

Income Tax Assessment Act 1997 subsection 115-100(a)

Income Tax Assessment Act 1997 section 118-37

Reasons for decision

Question 1

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Net capital gains are included as assessable income under subsection 102-5(1) of the ITAA 1997.

Section 102-20 of the ITAA 1997 provides that you make a capital gain or loss as a result of a CGT event happening to an asset in which you have an ownership interest.

Under section 108-5 of the ITAA 1997 a CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include part of or an interest in property or a legal or equitable right that is not property.

Contractual rights under an insurance policy are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, forfeited or expiring. The time of the event is when you enter the contract that results in the asset ending; or if there is no contract - when the asset ends. You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those proceeds are less than the asset's reduced cost base.

Application to your circumstances

When the insurance company paid the sum insured in satisfaction of your contractual right under the Policy, your ownership of the right was discharged or satisfied. This discharge or satisfaction of the contractual right will give rise to CGT event C2 pursuant to paragraph 104-25(1)(b) of the ITAA 1997.

Accordingly, the lump sum you received as settlement of a 'cross insurance' policy will be subject to the CGT provisions.

Question 2

Section 118-37 of the ITAA 1997 states:

(1)            A capital gain or capital loss you make from a CGT event relating directly to any of these is disregarded:

(a)           compensation or damages you receive for:

(i)          any wrong or injury you suffer in your occupation; or

(ii)          any wrong, injury or illness you or your relative suffers personally;

(b)           compensation or damages you receive as the trustee of a trust (other than a trust that is a complying superannuation entity) for:

(i)          any wrong or injury a beneficiary of the trust suffers in his or her occupation; or

(ii)          any wrong, injury or illness a beneficiary of the trust, or the beneficiary's relative, suffers personally;

(ba)           a CGT asset you receive, as a beneficiary of a trust, from the trustee of the trust to the extent that the CGT asset is attributable to compensation or damages that the trustee receives as described in paragraph (b) for:

(i)          any wrong or injury you suffer in your occupation; or

(ii)          any wrong, injury or illness you or your relative suffers personally;

Capital gains received under any other circumstances will not be disregarded under section 118-37 of the ITAA 1997.

Application to your circumstances

The capital gain which arises in relation to the insurance payment you received will not be disregarded under Section 118-37 of the ITAA 1997 as you or your relatives were not injured and Individual 2 is not your relative.

In addition, there is no evidence of a trust relationship being established either in writing or through conduct.

Therefore, the CGT will not be disregarded under this section.

Question 3

Subdivision 115-A of the ITAA 1997 provides for the conditions for a discount capital gain. Relevantly, the conditions include that the capital gain must be made by an individual, a complying superannuation entity, a trust, or a life insurance company. The capital gain must result from a CGT event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event.

The discount percentage for an amount of a discount capital gain is 50% subject to certain conditions - section 115-100(a) of the ITAA 1997 Taxation ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts discusses the CGT implications for compensation receipts.

TR 95/35 states that a right under an insurance policy is an asset, and for the purposes of this Ruling, falls within the definition of a right to seek compensation. This right is acquired by the policy owner when the triggering event of the policy occurs. The payment of the claim by the insurer results in the disposal of the right of the policy owner.

Application to your circumstances

The right to seek compensation was acquired at the time the triggering event of the Policy occurred, being when Individual 2 advised by the doctor that they were permanently disabled. The asset was disposed of when the insurance company made payment of the lump sum to you.

The right existed for a period of less than 12 months; therefore, you are not entitled to apply the 50% CGT discount to reduce your capital gain

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