Edited version of private ruling

Authorisation Number: 1011818043812

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Ruling

Subject: lump sum payment

Question 1

Will any part of your settlement to release and extinguish your entitlement under a risk insurance policy constitute assessable income?

Answer

No.

Question 2

Will any part of your settlement be assessable under the capital gains tax (CGT) provisions?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts

The arrangement that is the subject of the private 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 .

· copy of the Statement of Claim

· copy of the Deed of Settlement and Release

You held a risk insurance policy for a number of years.

The policy provided life insurance plus sickness and accident insurance.

You became ill and made claims for benefits under the policy.

A dispute arose about your entitlement to the benefits and your insurer ceased paying your benefits under the policy.

You commenced legal proceedings against the insurer.

The insurer denied that you were entitled to relief claimed in the Action or any relief.

You were made an offer to settle the court proceedings and your entitlement to benefits under the policy.

You accepted the offer and the lump sum payment distributed as per the Deed of Settlement and Release.

The insurer did not provide a break up or details of the lump sum payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

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

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (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 include receipts that:

· are earned

· are expected

· are relied upon

· have an element of periodicity, recurrence or regularity.

The lump sum payment you accepted 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.

The nature of the payment 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 CGT event happening to your right to seek compensation.

Your settlement is a result of legal action where entitlement to receive income from the policy was in dispute. It is not a lump sum payment which only substitutes for an income stream but rather for entering into a Deed of Settlement and Release with your insurer for the purpose of surrendering your rights under the policy. We are unable to determine what portion or if any portion of your lump sum is for loss of income. The lump sum also relates to giving up your rights under the policy which is regarded as capital in nature. As your lump sum payment may comprise income and capital items and the payment cannot be dissected into parts, the whole amount is deemed to be of a capital nature, and not ordinary income. Therefore the amount is not assessable under section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.

Receipt of a lump sum payment may give rise to a capital gain (statutory income). However paragraph 118-37(1)(b) of the ITAA 1997 disregards payment or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness.

Applying paragraph 118-37(1)(b) of the ITAA 1997 to your circumstances, the lump sum payment 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 your policy. As all of these claims relate to your illness, any capital gain or loss arising from the surrender of your rights under this policy will be disregarded.

If the amount is not ordinary or statutory income it is not assessable income. Therefore no part of the settlement amount is required to be included in your assessable income.