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Edited version of your written advice
Authorisation Number: 1051335978349
Date of advice: 8 February 2018
Ruling
Question 1
Is the payment assessable as ordinary income?
Answer
No
Question 2
Is any capital gain (CGT) made as a result of the payment disregarded?
Answer
Yes
This ruling applies for the following period(s)
Year ended 30 June 2018
The scheme commences on
1 July 2017
Relevant facts and circumstances
xxxx was appointed as Executor of the Estate of xxxx.
The deceased, xxxx, passed away on the xxxx
Upon the deceased’s death, an application was made to xxxx for the Estate to receive a payout of both the superannuation component and the life insurance component of the policy.
The superannuation component was paid out on xxxx.
The life insurance component was denied based on fact that the deceased had a pre-existing medical condition at the time of taking out the policy.
On the xxxx xxxx reviewed the insurance policy and made a payment to the estate for the insurance component of xxxx.
Relevant legal provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 6-10
Income Tax Assessment Act 1997 Subsection 118-300
Income Tax Assessment Act 1997 Subsection 118-300(1A)
Reasons for decision
Ordinary Income
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, 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.
A lump sum payment received from a life insurance policy does not relate to personal services, property, or the carrying on of a business. The lump sum more correctly relates to the personal circumstances of the taxpayer. 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 within which personal services are performed. Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.
Capital Gains Tax
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, and are also included in assessable income.
Amounts received as a lump sum are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.
The surrender or discharge of a life insurance policy gives rise to a CGT event (section 104-5 of the ITAA 1997 - CGT Event C2). However, section 118-300 of the ITAA 1997 excludes from the application of CGT provisions certain capital gains or capital losses relating to the taxpayer’s interests under insurance policies, in specified circumstances.
A capital gain or loss from a relevant CGT event happening in relation to a taxpayer's interest in rights under a policy of insurance on the life of an individual or an annuity instrument is disregarded if:
● the taxpayer is the original owner of the policy or instrument (other than the trustee of a complying superannuation fund);
● the taxpayer acquired the interest in the policy or instrument for no consideration; or
● the taxpayer is the trustee of a complying superannuation entity for the income year in which the CGT event happened.
Under subsection 118-300(1A) where a trustee then makes a payment to a beneficiary in respect of the policy or instrument, any capital gain or capital loss made by the beneficiary is also disregarded. This exemption also applies where a payment of the proceeds of a life insurance policy is made by an executor of a deceased estate to a beneficiary.
The life insurance payment would be paid to the policy owner and the deceased xxxx was the policy owner. Therefore, the beneficiary’s will acquire interest in the payment for no consideration, accordingly section 118-300 of the ITAA 1997 will apply and any capital gain or capital loss made will be disregarded.