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Ruling

Subject: Lump sum trauma insurance payment

Question

Is a lump sum payment received under the trauma terms of an insurance policy, assessable?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You had major surgery and had to take three months off work.

You have an income protection policy but could not claim for loss of income due to the waiting period.

Your insurance policy also covered a trauma benefit which has no waiting period.

Your claim under the trauma benefit was accepted and in accordance with the terms of the policy you received a lump sum payment.

You have provided a copy of the confirmation details of the trauma payment from your insurer.

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) 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:

· 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 payment as it does not directly relate to services performed. Rather the lump sum relates to personal circumstances that have arisen as a result of your medical condition. 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 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.

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 95/35 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 your right to seek compensation 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.

Accordingly, the lump sum payment that you received as a result of your medical condition is not assessable under either section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997.

Consequently, no part of the lump sum payment is included in your assessable income for the year it is received.