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Edited version of private advice
Authorisation Number: 1052393013273
Date of advice: 30 May 2025
Ruling
Subject: Compensation payment - lump sum
Question 1
Is the insurance payout under an income protection insurance policy treated as assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year it was received?
Answer 1
No. In your case the lump sum critical illness benefit payment is for compensation due to an illness or injury and not for any loss of earnings. The one-off lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the Income Tax assessment Act 1997 (ITAA 1997).
The specific benefit payment was made under an optional extra component, which was paid when certain medical events happened. Eligibility for the critical illness payment didn't depend on loss of income or inability to work. In addition, the payment bears none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence, or regularity.
Question 2
Is any capital gain or loss you make due to receiving to receiving the critical illness benefit payment disregarded?
Answer 2
Yes. The payment was made to you for compensation for an illness you personally suffered. Therefore, any capital gain or capital loss arising from a CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payment will not be assessable as statutory income.
As the lump sum payment is not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commenced on:
4 March 20XX
Relevant facts and circumstances
You held an income protection policy.
You were diagnosed with a medical condition.
Under your income protection policy, you were entitled to receive a critical illness benefit if you are diagnosed with a critical illness.
Your medical condition is listed as a recognised critical illness covered by the critical illness clause in your insurance policy.
You made a claim and subsequently received a lump sum payment as a critical illness benefit.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 118-37
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