Edited version of private ruling

Authorisation Number: 1011817043889

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Ruling

Subject: Insurance payments

Question

Are the family support and major trauma payments made under the terms of an insurance policy assessable?

Answer: No.

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling,

· insurance policy and conditions, and

· payment details.

You have held a loss of income insurance policy for several years, and have been receiving payments under the terms of the policy.

The insurance provides disability benefits as well as other benefits.

The payments received by you under the policy include major trauma benefit and family support benefit. The family support benefit was paid for a total of three payments in as many months, triggered once your disability benefit payment commenced. The major trauma benefit is also payable periodically.

Reasons for decision

Major trauma payments

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident 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 trauma payment is not earned by you as it does not directly relate to services performed. Rather the payment relates to personal circumstances that have arisen during your life and therefore, the trauma payments do not have the character of income. Although the payments can be said to be expected, and perhaps relied upon, this expectation arises from the investment in insurance, rather than from a relationship with personal services performed. That is the payment is not paid for employment, services rendered or income replacement.

The character of the receipt in the hands of the recipient is relevant. Lump sum personal injury and trauma payments are not generally assessable as ordinary income. In your case the payments are paid periodically. This factor alone does not change the character of the payment to one of an income nature. Where the trauma payment is not paid one-off, the amounts are considered as instalments of a capital lump sum. These amounts are of a capital nature. Thus, the payment is not considered ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Family support benefit

You have received three payments of family support benefit. As stated under the terms of your insurance policy, this benefit is only payable:

1. If at least one month's disability benefit is paid for a life insured under loss of income, and

2. While your spouse or immediate family member is not working solely to provide care and assistance to you.

The family support benefit is not earned by you as it does not directly relate to services performed. Rather the payment relates to personal circumstances that have arisen during your life and therefore, the family support payments do not have the character of ordinary income. The question of whether or not the payment is expected is similar to the major trauma payment.

The amount received relates to the care and support provided by your family. The amounts of family support benefit are stated in your insurance policy, and so may be considered as instalments of a capital lump sum, which are of a capital nature. Thus, the payment is not considered ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Capital gains

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Taxation Ruling TR 95/35 indicates that settlement of a personal injuries claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the losses arising from the injury suffered. The disposal of an asset gives rise to a capital gains tax (CGT) event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards the payments or receipts where the amount relates to compensation or damages a taxpayer received for any wrong, injury or illness a taxpayer suffered.

The payments received by you for trauma and family support benefit are not assessable under section 6-5 of the ITAA 1997 as they are not ordinary income. The payments are also disregarded from CGT by the operation of paragraph 118-37(1)(b) of the ITAA 1997. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income.

Therefore the trauma and family support benefits do not form part of your assessable income.