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Edited version of your private ruling
Authorisation Number: 1012541316656
Ruling
Subject: Lump sum payment
Question
Is the lump sum payment you received under the critical conditions benefit of an income protection policy assessable as either ordinary income or as a capital gain?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2013
The scheme commences on
1 July 2013
Relevant facts and circumstances
You have an income protection policy.
You were diagnosed with an illness.
In accordance with the terms of your insurance policy, a lump sum payment was payable on diagnosis of this illness.
You submitted a claim which was accepted by the insurer.
The lump sum payment you received was equal to 6 months of a predetermined monthly benefit, being payable once only.
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)
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 suffered.
In your case, you will not be subject to capital gains tax in respect of the amount you have received.