Edited version of your written advice

Authorisation Number: 1051398951331

Date of advice: 13 July 2018

Ruling

Subject: Insurance benefit payment

Question 1

Is your lump sum payment assessable as ordinary income?

Answer

No

Question 2

Is any capital gain arising from the lump sum payment included in your assessable income?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You become ill in 20XX, and due to this you were unable to work.

You held an insurance policy with an Australian insurer, which was administered by your employer.

An additional benefit was available under the policy if you could return to work following the completion of a specific program approved by the insurer, and you remained in full-time employment for a specified period of time.

On satisfaction of these conditions, the insurer would pay the benefit in accordance with the terms of the policy.

You completed the relevant program which assisted you to return to work with your employer, and following your return to work you received the benefit payment as a lump sum.

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.

Income Tax Assessment Act 1997 Section 104-25.

Income Tax Assessment Act 1997 Paragraph 118-300(1).

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

Reasons for decision

Question 1

Ordinary income

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.

Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

Payment receipts which are a substitute for income have also been held by the courts to be income under ordinary concepts.

In your case you received a benefit payment from an insurance company upon completion of a specific program to assist you to return to work with your employer.

The payment was not income from rendering personal services, income from property or income from carrying on a business, nor is it intended to replace income.

The amount you received was also a one off payment and thus it did not have an element of recurrence or regularity.

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

Question 2

Capital gains tax

While a payment may be exempt from being characterised as ordinary income, a capital gain may still be made.

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, and included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.

Part 3-1 of the ITAA 1997 contains the capital gains and capital loss provisions commonly referred to as CGT (capital gains tax). You make a capital gain or capital loss if a CGT event happens in respect of a CGT asset.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if an ownership of an intangible asset ends by way of cancellation, surrender and similar endings. Intangible assets include the right to receive an amount of money.

As you have received a lump sum payment amount under an insurance policy, this is deemed to be CGT event C2, and a capital gain will usually arise in these situations.

Therefore, the net capital gain you made is included in your assessable income under section 102-5 of the ITAA 1997.

CGT Exemptions

The CGT provisions provide that some capital gains and losses made in relation to particular types of CGT assets can be disregarded.

In your case we have examined the most relevant CGT exemption provisions that may have been applicable to your situation, and these are listed below.

Payments relating to insurance policies

Paragraph 118-300(1) of the ITAA 1997 allows a capital gain to be disregarded in certain circumstances where the CGT asset is an interest in rights under an insurance policy. These circumstances include general insurance policies where property is insured and life insurance policies.

In your case, you held an insurance policy, which offered various benefits relating to becoming ill or being injured at work.

As the purpose of the policy is to ensure employees are covered in the event they are unable to work due to an accident or illness, this provision has no application.

As such, any capital gain arising from the payment received cannot be disregarded under Paragraph 118-300(1) of the ITAA 1997.

Payments received for illness or injury

Paragraph 118-37(1)(b) allows a capital gain to be disregarded if it is compensation or damages you receive for any wrong, injury or illness you suffer personally.

In your case you received an insurance benefit payment, which was a specific benefit paid under an insurance policy.

Whilst the payment was indirectly related to your illness, it was not paid as a consequence of your illness. The payment was made to you once you had met the relevant criteria to receive the payment, in accordance with the terms of the policy.

Accordingly, as the incentive payment received was not a compensation payment, and it was also not for the illness you suffered for the purposes of paragraphs 118-37(1)(a) of the ITAA 1997, any capital gain arising from the payment received cannot be disregarded under that provision.

Conclusion

In your case, you have received a full and final settlement of any claims under your policy with a lump sum payment. Acceptance of the lump sum is considered as the ending of your rights under the insurance policy. This gives rise to CGT event C2.

Therefore, the lump sum payment will be assessable as a capital gain under section 102-5 of the ITAA 1997 and the abovementioned exemptions contained in sections 118-300 and 118-37 of the ITAA 1997 do not apply.