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Edited version of your private ruling
Authorisation Number: 1012453657775
Ruling
Subject: Lump sum payment made to the estate by an insurance company
Question
Is the death benefit paid to the estate from an income protection policy assessable?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
Total disability benefits under income protection insurance had been paid up until the death of the taxpayer.
These payments represent income replacement and will be included in the taxpayer's final return.
The insurer has, under the policy, made a lump sum payment to the estate of the deceased being a death benefit.
The death benefit is listed as a feature in the insurer's product disclosure statement.
A copy of the insurer's letter to the estate confirming payment details have been provided.
The income protection insurance was purchased by the taxpayer.
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)
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.
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.
Accordingly, no part of the lump sum payment is assessable under subsection 6-5(2) of the ITAA 1997 as ordinary income.
Statutory income
As the lump sum payment the estate received from the insurance company is not considered ordinary income it must then be determined if the amount received would be statutory income.
The only forms of statutory income which may apply to the lump sum payment would be;
· Employment termination payments
· Superannuation death payments
· Capital gains tax (CGT)
In this case the payment made is not due to the termination of employment or because of a membership with a superannuation fund nor is it a loss or gain from a CGT event. Therefore, the lump sum payment is not assessable as statutory income.
Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income or statutory income it is not assessable income and you are not required to include the amount in the estate's tax return.