Edited version of your written advice

Authorisation Number: 1012841728678

Date of advice: 16 July 2015

Ruling

Subject: The assessability of insurance policy benefit

Question

Is the lump sum specific injury payment that you received under the terms of your insurance policy assessable income?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You hold an income protection insurance policy.

Your policy provides for payment of a specific injury amount if an insured event occurs to the insurer. The benefit amount is specified in your policy.

The terms of your policy states that under an agreed value cover the specific injury benefit will be the insured monthly benefit multiplied by the period of cover for the specific injury.

The income benefit is not payable while the specified injury benefit is being paid.

In your case the sum insured under your income protection policy was $X per month.

You were diagnosed with an injury which required surgery.

Your payment period under the specific injury benefit cover the specific injury, as specified in your policy, is X months.

Your insurer paid you a lump sum amount for the specified injury benefit for the payment period listed in your policy.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-1(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 subsection 6-15(1)

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

Reasons for decision

Assessable income consists of ordinary income and statutory income under subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called 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.

The lump sum payment of the specific injury benefit was not earned by you as it does not directly relate to services performed. Rather the lump sum relates to personal circumstances that have arisen during your life. 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.

The lump sum payment of the specific injury benefit is not considered ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Statutory income

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by specific provisions of the income tax law, are called statutory income.

These specific provisions of the income tax law are listed in section 10-5 of the ITAA 1997, and include the capital gains tax (CGT) provisions.

Taxation Ruling TR 95/35 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 whole of the settlement amount is thus treated as capital proceeds from a CGT event happening to the taxpayer's right to seek compensation.

However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Therefore any capital gain made from the CGT event happening to your right to seek benefits (compensation) under your risk insurance policy is disregarded under paragraph 118-37(1)(b) of the ITAA 1997.

The lump sum payment of the specific injury benefit that you received under your income protection insurance policy is therefore not statutory income.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount you received is included in your assessable income.

Other information

Please note that as your insurance policy provides for capital as well as income benefits, the whole of your premium is not tax deductible. You have to make a reasonable apportionment and claim only the portion of the premium that relates to income benefits provided for under the policy.