Edited version of private ruling

Authorisation Number: 1011861208052

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Ruling

Subject: Tax offsets - lump sum payment in arrears

Question 1

Are you entitled to a lump sum payment in arrears tax offset for a lump sum payment you received under an income protection insurance policy where you are the policy owner?

Answer

No.

Question 2

Is the assessable portion of the lump sum payment apportioned over the period of the claim?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2000

Year ended 30 June 2001

Year ended 30 June 2002

Year ended 30 June 2003

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 June 1994

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 of private ruling dated and accompanying documents

· copy of Statement of Claim/Orders

· copy of Deed of Release and Discharge

· copy of Strategic Income Replacement policy document

You took out an income replacement insurance policy. You are listed as the policy owner and you have been and remain insured under the policy.

Insurer A merged with Insurer B. Insurer B assumed any liability under the policy and continues to do so.

You were diagnosed and treated for several conditions.

As a consequence of the conditions, you suffered a further condition, which constituted a sickness within the meaning of the Policy.

You were diagnosed with further illness which constituted a sickness within the meaning of clause 8.16 of the policy.

You ceased work, and continue to be unable to engage in any form of regular paid employment.

As a result of your conditions, you made claims upon the insurer for income replacement benefits and received payment of the benefit.

At a latter date you received a letter from Insurer B advising of a discrepancy in your application, and they revised the benefits under the contract.

You received several lump sum payments over a period of time.

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

You commenced legal proceedings against the insurer.

Your claim was for:

1. declaration that defendant pay you in accordance with the policy terms of the contract.

2. declaratory judgment and interim assessment of damages

3. damages

4. exemplary and aggravated damages

5. a refund of premium paid to date

6. damages pursuant of Section 13 of the Insurance Contracts Act

7. interest

8. costs

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 you accepted the offer.

The settlement sum comprised of the following:

i. contract benefits

ii. premium refund

iii. interest

iv. damages

Your policy remains current.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 159ZRA.

Income Tax Assessment Act 1936 Section 159ZR.

Income Tax Assessment Act 1936 Subsection 159ZR(1)

Taxation Administration Act 1953 Section Sch1-12-120.

Reasons for decision

Lump sum in arrears tax offset

Individual taxpayers whose assessable income includes a lump sum payment containing an amount that accrued in earlier income years may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936).

For the tax offset to apply, the lump sum payment must be eligible income as defined in subsection 159ZR(1) of the ITAA 1936. Eligible income includes income by way of compensation or sickness or accident pay in respect of an incapacity for work, being payments calculated at a periodical rate, but does not include payments made under a policy of insurance to the owner of the policy (section 12-120 in Schedule 1 to the Taxation Administration Act 1953).

In your situation the lump sum payment you received is a payment under a policy of insurance that is owned by you. Therefore, the lump sum payment is excluded from the definition of eligible income and consequently is not an eligible lump sum. Accordingly, you are not entitled to a lump sum payment in arrears tax offset under section 159ZRA of the ITAA 1936.

Assessability of lump sum payment

Income protection policies provide for periodic payments in the event of loss of income caused by the insured becoming disabled through sickness or injury. These payments are assessable as income under section 6-5 ITAA 1997, as they are paid to take the place of lost earnings.

An amount received as a lump sum representing arrears of monthly compensation payments is classified as ordinary income and is assessable in the year received. This is the case even though the payment relates to an earlier income year.

In your case, you received a lump sum settlement payment from your insurer for unpaid contract benefits and the lump sum payment is assessable in full in the income year of receipt.