| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051218385228
Date of advice: 3 May 2017
Ruling
Subject: Insurance policies
Question 1
Are any of the benefit payments received by you assessable as either ordinary income or as a capital gain?
Answer
No.
Question 2
Are you entitled to a deduction for the premiums paid in relation to your insurance policies?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You purchased insurance policies.
The policies offered cover for different types of accidents.
The disclaimer advises that the policy is not a life insurance policy, income protection policy, nor a health insurance policy.
You suffered an accident that was covered under the policies and you receive payments.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Subsection 6-15(1)
Income Tax Assessment Act 1997 Section 8-1
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.
In order to determine the taxation treatment of an insurance benefit payment, the nature of the payment must be examined, as a compensation amount generally bears the character of that which it is designed to replace. (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82).
The benefit payments you received were not earned by you as they do not directly relate to services performed. Rather the payments relate to personal circumstances that have arisen during your life. 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.
Consequently, the payments you received under the policy are capital receipts and are not assessable under section 6-5(2) of the ITAA 1997 as ordinary income.
Capital Gains Tax (CGT)
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. Capital gains are one form of statutory income.
Taxation Ruling TR 93/35 deals with the capital gains treatment of compensation receipts. The ruling provides that an insured person's right of indemnity under a policy of insurance falls within the definition of a right to seek compensation.
The disposal of a taxpayer's right to seek compensation triggers the capital gains tax provisions. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'.
The payments received by you under the insurance policy are not assessable under subsection 6-5(2) of the ITAA 1997 as they are not ordinary income. The payments are also disregarded from CGT by the operation of paragraph 118-37(1)(b) of the ITAA 1997. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income.
Premiums
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.
The expenses incurred for your insurance have no direct connection to the gaining or producing of your assessable income. The purpose of the expense is to cover you in case of an accident. There is insufficient connection to the gaining or production of your assessable income for a deduction to be allowed as the expenditure is too remote.
Therefore, you are not entitled to a deduction for contributions for health insurance under section 8-1 of the ITAA 1997.