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Ruling

Subject: Lump sum insurance payment

Question

Is any part of the lump sum payments you received assessable as ordinary income or as a capital gain?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You took out a life insurance policy (the policy).

The policy included a death benefit, consumer price index benefit, waiver of premium benefit and disablement lump sum benefit.

You were involved in a work place incident several years ago which left you with a permanent disability.

You made a work cover claim in regards to the incident.

You also approached the insurer at the same time to enquire if you were eligible to make a claim on the policy. They advised that you were not eligible to claim a benefit.

In 2011 you made an enquiry in regards to the premium amounts on your policy. During the course of the conversation you were advised that previously provided advice in regards to you not being entitled to make a claim against the policy may have been incorrect.

You lodged claims for the disablement lump sum benefit and waiver of premium benefit. Your claims were accepted.

Two lump sum payments were deposited into your nominated bank account.

The first amount was paid under the waiver of premium benefit and your direct debit arrangement under the policy was cancelled.

The second amount was paid under the disablement lump sum benefit.

Your policy has now been cancelled in full as a result of your claims.

You have never included the premium amount of the policy as a deduction in your income tax returns.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

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

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

Reasons for 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 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.

In your case, you have not earned the lump sum payments as they do not directly relate to services performed. Rather the lump sums relate to personal circumstances that have arisen as a result of a workplace incident. The payments are also a one-off payment and thus do not have an element of recurrence or regularity. 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.

The payment you have received under the disablement lump sum benefit and the refund of your premiums are a capital receipt and are not assessable under section 6-5(2) of the ITAA 1997 as ordinary income.

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. Capital gains are one form of statutory income.

Taxation Ruling TR 93/35 deals with the capital gains tax (CGT) 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 disposal of an asset gives rise to a 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 received for any wrong, injury or illness you suffered.

The lump sum payments you received for your permanent disablement are not assessable under subsection 6-5(2) of the ITAA 1997 as they are not ordinary income. The lump sums 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.