Edited version of your written advice

Authorisation Number: 1012831669488

Date of advice: 14 July 2015

Ruling

Subject: The assessability of lump sum crisis benefit amount

Question

Is the lump sum crisis benefit payment to be treated as assessable income?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Under the additional options of your income protection insurance policy, you are eligible to receive a crisis recovery benefit in the event of certain medical conditions occurring. This consists of a lump sum amount which is paid to you upon you experiencing a particular disease or medical condition in accordance with the terms of the policy.

You experienced a defined medical condition and subsequently received a lump sum payment in the 2014-15 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 6-10,

Income Tax Assessment Act 1997 Section 15-30,

Income Tax Assessment Act 1997 Section 102-5 and

Income Tax Assessment Act 1997 Section 118-37(1)(b).

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). 

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 compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. 

In your case the crisis recovery benefit payment will be made under the additional options of your income protection policy as a result of you suffering a major medical condition. This provision allows for a defined lump sum payment to be made to you that is determined by the terms of the policy and is unrelated to your actual earnings.

The payment is a one-off payment and 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 pain and suffering resulting from the disease or medical condition, rather than from a relationship to personal services performed.

Compensation receipts which are intended as a substitute for income have been held by the courts to be income under ordinary concepts. However, no component of the lump sum payment made to you is intended to compensate you for any loss of income.

Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997 in the 2014-15 financial year.

Capital gains tax arising from the compensation payment

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.

However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally. 

Accordingly, the lump sum payment receivable under the additional options of your insurance cover is not assessable under either section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997.