Edited version of your written advice

Authorisation Number: 1012724599157

Ruling

Subject: Lump sum payment

Question

Is the lump sum payment received from surrendering your life insurance policy assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You took out a life insurance policy more than 20 years ago.

You decided to close your policy as you had another policy which would cover death or disability.

You received a lump sum benefit when you closed your policy.

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 118-300

Detailed reasoning

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 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.

A lump sum payment received from the surrender of a life insurance policy does not relate to personal services, property, or the carrying on of a business. The lump sum more correctly relates to the personal circumstances of the taxpayer. 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 within which personal services are performed. Thus, the lump sum payment is not 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, and are also included in assessable income.

Amounts received as a lump sum are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

The surrender or discharge of a life insurance policy gives rise to a CGT event (section 104-5 of the ITAA 1997 - CGT Event C2). However, subsection 118-300(1) of the ITAA 1997 provides that if a CGT event happens to a life insurance policy and the taxpayer is the original beneficial owner of the policy, the amount received as a result of the event is disregarded.

In your case, you are the original beneficial owner of the policy and the surrender of the policy constituted a CGT event. The lump sum payment received as a result of the surrender of your life insurance policy is disregarded and therefore excluded from your assessable income.

The lump sum you received is not included in your assessable income under the CGT provisions or any other taxation provision. Therefore your payment is not included on your tax return.