Edited version of your private ruling

Authorisation Number: 1012421042111

Ruling

Subject: Lump sum death benefit payment

Question

Is the death benefit paid from an income protection policy assessable?

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

Total disability benefits under an income protection insurance plan had been paid for a period the death of taxpayer.

These payments represented income replacement and have been included in taxpayer's tax returns.

The insurer has under the policy made a lump sum payment to the estate of the deceased being a remainder of the total disability benefits entitled to the taxpayer.

Payment has been made under Clause D1.5.2 of the policy as a death benefit and states if a person insured dies while the plan is still current, the insurer will pay the insured or the insured's estate a lump sum equal to six times the total disability benefit, with a maximum amount payable of $60,000.

A copy of the insurer's letter to the estate confirming payment details and extract of policy containing death benefits have been provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

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

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:

a) are earned

b) are expected

c) are relied upon, and

d) have an element of periodicity, recurrence or regularity.

The lump sum payment received is not income from rendering personal services, income from property or income from carrying on a business. Rather the payment relates to circumstances that have arisen at the end of the taxpayer's life.

The payment is a one off payment and thus does not have the 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 with personal services performed.

Thus, the lump sum payment is not considered ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

The policy states that should the person insured dies while the plan is still current, the insurer will pay the policy holder or the estate a lump sum equal to six times the total disability benefit with a maximum amount payable of $60,000.

In this case, the insurer has paid the estate a lump sum amount representing the remainder of the total disability benefits as per the policy after the death of the policy holder.

The monthly payments the estate has received under the income protection policy were assessable as they were to replace income. This is not the case with the payment to the estate as it is a payment relating to the death, not income substitution. The payment is a capital amount paid to the estate as a result of the death of the taxpayer while receiving benefits under the income protection policy.

Consequently, the lump sum payment is a capital receipt and is not ordinary income. Therefore the amount is not assessable under section 6-5 of the ITAA 1997.

Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. Section 102-5 of the ITAA 1997 provides that assessable income includes net capital gains for the income year. However, a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally is disregarded, paragraph 118-37(1)(b) of the ITAA 1997.

Section 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 your assessable income.