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Edited version of your private ruling
Authorisation Number: 1012480321740
Ruling
Subject: Lump sum payment
Question
Is the payment you have received under the trauma terms of an insurance policy assessable as either ordinary income or as a capital gain?
Answer
No.
This ruling applies for the following periods
Year ending 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
You were diagnosed with an illness.
In accordance with the terms of your insurance policy, a trauma benefit was payable on the diagnosis of this illness.
You submitted a claim which was accepted by the insurer.
You received a lump sum payment, being payable once only.
Your plan has now been cancelled and there are no remaining benefits available to you.
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 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 illness. 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 93/35 deals with the capital gains 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 ... suffer personally'.
In your case, you will not be subject to capital gains tax in respect of the amount you have received.
Conclusion
As the amount is not ordinary or statutory income it is not assessable income. Therefore no part of the settlement amount is required to be included in your income tax return.