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Edited version of your private ruling
Authorisation Number: 1012540719760
Ruling
Subject: insurance payment
Question
Is the insurance payment assessable as ordinary income?
Answer
Yes.
This ruling applies for the following period:
Years ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You have an investment.
You expected to receive a return from the investment. The proceeds from the investment would be ordinary assessable income.
You had insurance against destruction of your asset.
There was an event that resulted in the destruction of your investment. Your total investment was lost. This also resulted in the loss of all future income.
You received an insurance payout in the 2011-12 income year. The amount was less than the value of the investment.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Ordinary income has generally been held to include three categories, namely, income form rendering personal services, income from property and income from carrying on a business.
The assessability of insurance proceeds depends on the purpose of the insurance and on whether the amounts received took the place of benefits on revenue account if the insured event had not occurred.
That is, the question is whether the amount received is in the nature of ordinary income as an amount replacing the income which the taxpayer would have received from the investment, or whether the amount is for the replacement of capital.
As highlighted in Taxation Determination TD 93/58, compensation is assessable as ordinary income if the payment is compensation for loss of income, for example past year profits.
The purpose of the insurance policy was to diminish the adverse economic consequences of destruction to your investment and to protect against the associated income loss. The benefits from such insurance have a revenue character and the proceeds would be assessable.
In your case it is considered that your insurance payment compensates you for loss of income you were expecting from your investment. Although the amount of insurance may not equal the full value of your investment, this does not change the nature of the payment. The insurance payment received in relation to your managed investment scheme is revenue in nature and is assessable as ordinary income under section 6-5 of the ITAA 1997. The payment is assessable income in the year of receipt.