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Authorisation Number: 1012061439898

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Ruling

Subject: Foreign life assurance policy

Question

Is the lump sum payment received from proceeds of a life assurance policy on the death of the policy holder included as assessable income?

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a resident of Australia for tax purposes.

In 2010, your relative died and you were nominated as a beneficiary of the life assurance policy.

In the 2011 income year, you were paid a lump sum in foreign currency.

Relevant legislative provisions

subsection 6-5(2) of the Income Tax Assessment Act 1997

section 6-10 of the Income Tax Assessment Act 1997

subsection 6-15(1) of the Income Tax Assessment Act 1997

section 6-20 of the Income Tax Assessment Act 1997

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

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include 3 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.

A lump sum payment received from the surrender of a life assurance policy does not relate to personal services, property, or the carrying on of a business. The lump sum more correctly relates to the personal circumstances of the taxpayer. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the investment in insurance, rather than from a relationship within which personal services are performed. Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

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 deals with the capital gains treatment of compensation receipts. The ruling provides that an insured'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 (CGT event C2) happening to the taxpayer's right to seek compensation.

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'. Therefore any capital gain made from the CGT event happening to the taxpayer's right to seek compensation is disregarded under paragraph 118-37(1)(b). It is thus 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 the taxpayer's assessable income.

Note: the exception listed in paragraph 118-37(1)(b) of the ITAA 1997 is not an exemption as provided for in section 6-20 of the ITAA 1997.