Edited version of private ruling

Authorisation Number: 1011759223772

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Ruling

Subject: lump sum payment

Question

Is the lump sum payment you will receive in settlement of your claim assessable?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You suffered a workplace injury.

You were later deemed to come under the definition of total disablement under your employer's income protection policy (the policy).

Under the policy you were paid a monthly benefit.

Your insurer has proposed a lump sum payment to surrender the policy.

The payment represents a full and final settlement of any future rights, benefits and entitlements from the insurer.

Your insurer's offer of settlement is made on a purely commercial basis without admission of liability and there is no calculation of benefits under the policy.

You have provided a copy of the policy and deed of release.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-15(1)

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

Reasons for decision

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

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 includes receipts that:

· are earned;

· are expected;

· are relied upon; and

· have an element of periodicity, recurrence or regularity.

The lump sum payment you will receive is not income from rendering personal services, income from property or income from carrying on a business.

The payment is also a one off payment and thus it does not have an element of recurrence or regularity.

A payment of the nature described in the scheme generally bears the character of that which it is designed to replace. If the lump sum payment is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling provides that an insured person's right of indemnity under a policy of insurance falls within the definition of a right to seek compensation. The whole of the settlement amount is thus treated as capital proceeds from a capital gains tax (CGT) event happening to your right to seek compensation.

The lump sum payment you will receive is for entering into a settlement agreement with your insurer for the purpose of surrendering your rights under the insurance policy. Consequently, 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 ITAA 1997.

The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'.

Applying paragraph 118-37(1)(b) to your circumstances, the lump sum would not be considered as an assessable capital gain. The insurer's purpose in making the lump sum payment is so you would surrender your rights, not only to recover any such benefits in the action, but also to claim any further benefits to which you might now or in the future have an entitlement under the income protection policy. As all of these claims relate to your personal injury or illness, any capital gain or loss arising from the surrender of your rights under this policy will be disregarded. As such, this amount is not statutory income.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount received is included in your assessable income.