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Edited version of your written advice
Authorisation Number: 1012728322798
Ruling
Subject: Income protection payment
Question 1
Are you assessable on the payment you received as part of the specific injuries benefit clause of your income protection policy?
Answer
No.
Question 2
Will any capital gains arising from the compensation payment be disregarded?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You hold an income protection insurance policy.
You suffered an injury and made a claim under the specific injuries benefit part of the policy.
You received a once off lump sum benefit plus superannuation.
Your premiums for the period were also refunded.
You also received sick pay from your employer for the period you were off work.
The receipt of the sick pay does not affect your claim.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
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, the payment you have received was not from rendering personal services, income from property or income from carrying on a business. Although the payment may have been expected and relied upon, it was not earned and was received in a lump sum. Therefore, the payment you received is not assessable as ordinary income.
Capital gains tax (CGT)
Amounts received in respect of personal injury which are not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the CGT provisions of the ITAA 1997.
Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts, deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.
However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Therefore, any capital gain that may arise from the receipt of the lump sum payment for injury will be disregarded.