Edited version of your written advice

Authorisation Number: 1051440806341

Date of advice: 16 October 2018

Ruling

Subject: Lump sum payment – finalisation of insurance policy

Question 1

Is the lump sum payment that you have received to finalise your income protection policy claim, assessable as ordinary income?

Answer

Yes

Question 2

Is the lump sum payment you received to finalise your income protection insurance policy claim, included in assessable income under the capital gains provisions?

Answer

No

This ruling applies for the following period:

Period ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

You had an income protection policy issued under the Life Insurance Act

You sustained injuries as a result of a motor accident.

The insurance company accepted that you became totally and permanently disabled.

The insurance company commenced payment as per the policy.

The policy provides for payment of income protection benefits in the event of the claimants disability, subject to the terms and conditions of the policy.

A dispute between yourself and the insurance company developed.

To settle the dispute the insurance company offered to pay a sum and cancel the policy.

The deed of release states that you are liable to pay all taxes on the payment.

You agreed to this offer.

You signed the deed of release.

The deed of release surrendered all of your remaining rights and entitlements to benefits including income, and all other benefits under the Policy.

The Policy was cancelled.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

Reasons for decision

Question 1

Summary

The lump sum payment you have received from your insurer is an advance of your future monthly payments and is assessable under section 6-5 of the ITAA 1997 as ordinary income in the year it has been received.

Detailed reasoning

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources 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.

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.

An amount paid to compensate for loss generally acquires the same nature of what it is substituting Compensation payments which substitute income have been held by the courts to be income under ordinary concepts A lump sum payment is generally classified as ordinary income if it is simply a lump sum made up of periodic income payments but paid to cover a certain period.

Income protection policies provide for periodic payments in the event of loss of income caused by the insured becoming disabled through sickness or injury. These payments are assessable as income under section 6-5 of the ITAA 1997, as they are paid to take the place of lost earnings.

The lump sum is a receipt of income only, that is, there is no capital component in the payment.

Therefore, the lump sum payment you will receive from the insurer is an advance of your future monthly payments and is assessable under section 6-5 of the ITAA 1997 as ordinary income in the year it is received.

Question 2

The capital gains tax (CGT) provisions do not apply to the lump sum finalisation payment as it is otherwise included in your assessable income, as ordinary income.