Edited version of your written advice

Authorisation Number: 1013050523157

Date of advice: 15 July 2016

Ruling

Subject: Assessable income

Question

Is the lump sum Specific Illness Benefit payment that you received assessable income?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You are a partner of a Partnership (the partnership).

The partnership, as the policyholder, has taken out a salary continuance plan on behalf of the partner group.

All partners are automatically covered by the policy on joining and cover ceases automatically on departure.

The policy schedule covers a number of different medical events and provides for different types of payments depending on the nature of the event and the other relevant circumstances.

You were diagnosed with a qualifying medical condition.

The Specific Illness Benefit may be payable when an insured member suffers one of the medical conditions covered, and is payable without any waiting period even if the insured member continues to work and/or continues to receive their normal salary/remuneration.

You continued to receive your normal salary/remuneration until 2016.

You received a lump sum payment as a result of your specific illness.

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 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

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

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

Reasons for decision

Subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income consists of ordinary income and statutory income.

Ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer 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 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 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 Income tax: capital gains: treatment of compensation receipts 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 illness insurance policy is disregarded under paragraph 118-37(1)(b) of the ITAA 1997.

The lump sum payment that you received under the salary continuance plan 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.