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Edited version of your private ruling
Authorisation Number: 1012468804853
Ruling
Subject: Income - assessability of trauma insurance
Question 1
Is your lump sum payout of trauma insurance to be treated as assessable income?
Answer
No
This ruling applies for the following periods
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You received a lump sum payment of trauma insurance (insurance) in year ended 30 June 20XX.
This insurance was paid under a trauma life insurance policy which provides cover for personal protection reasons as opposed to revenue protection reasons.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)
Reasons for decision
Detailed reasoning
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
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 the payment you received was an insurance payment for trauma under a trauma life insurance policy. In accordance with paragraph 2 of Taxation Determination TD 95/41:
The purpose of trauma insurance is to provide a capital amount to the insured if the insured suffers a specified medical condition. The policy does not replace earnings lost by the taxpayer.
The payment does not have the characteristics of ordinary income and was not earned by you and did not relate to services performed. The payment is also a one-off payment and 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 suffering resulting from a medical condition.
Therefore the lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the ITAA 1997.
Capital Gains Tax
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.
Receipt of a lump sum payment may give rise to a capital gain (statutory income). However paragraph 118-37(1)(b) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness.
In your case, the payment was made to you under a trauma life insurance policy, and as such the payment will be exempt from capital gains tax under paragraph 118-37(1)(b) of the ITAA 1997.