Edited version of your written advice

Authorisation Number: 1051445235771

Date of advice: 25 October 2018

Ruling

Subject: Insurance payments – crisis benefit – refund of premiums

Question 1

Is the lump sum payment you received included in your assessable income?

Answer

No.

Question 2

Is the amount received as a refund of the premium payable for the policy included in your assessable income to the extent that the premium was deductible?

Answer

Yes.

This ruling applies for the following period

Financial year ending 30 June 2018

The scheme commenced on

01 July 2017

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You currently hold an income protection policy.

You are both the insured and the policy owner.

The policy provides a lump sum benefit if you are diagnosed with one of the medical conditions specified in the policy. This lump sum is paid whether or not you can return to work.

The lump sum amount is calculated as six times the total of the monthly benefit payable under the policy.

The policy also includes a feature which provides that the insured does not need to pay premiums during the six month period after payment of a lump sum benefit for the life insured.

You were diagnosed with one of the specified medical conditions and received a lump sum payment.

You received a refund of part of the premiums paid at the same time you received the lump sum payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5

Income Tax Assessment Act 1997 section 6-10

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

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 subsection 104-25(1)

Income Tax Assessment Act 1997 subsection 104-25(2)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(ii)

Reasons for decision

Lump sum payment

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 3 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 you received does not meet the characteristics of ordinary income, and therefore is not assessable under section 6-5 of the ITAA 1997.

Amounts that are not ordinary income, but are included in your assessable income by another provision are called statutory income (section 6-10 of the ITAA 1997).

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is section 102-5 (capital gains).

Your assessable income includes your net capital gain for the income year (subsection 102-5(1) of the ITAA 1997). You make a capital gain (or loss) as a result of a CGT event happening (section 102-20).

CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being redeemed, released, discharged or surrendered (subsection 104-25(1) of the ITAA 1997). The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends (subsection 104-25(2)).

A CGT asset is any kind of property or a legal or equitable right that is not property (section 108-5 of the ITAA 1997).

In your case, your right to seek compensation (make a claim under the policy) was an intangible CGT asset and your ownership of that asset ended when you received the lump sum payment from the insurer. You made a capital gain at that time.

However, subparagraph 118-37(1)(a)(ii) 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. As the lump sum payment is for a wrong, injury or illness you have suffered, the capital gain you made is disregarded under subparagraph 118-37(1)(a)(ii) of the ITAA 1997. Consequently the lump sum payment is 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.

Refund of premiums

The amount you received as a refund of your insurance premiums does not have any of the elements of ordinary income outlined above. Therefore, the amount refunded is not included in your assessable income under section 6-5 of the ITAA 1997.

However, as noted above, amounts that are not ordinary income, but are included in your assessable income by another provision are called statutory income (section 6-10 of the ITAA 1997).

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is Subdivision 20-A of the ITAA 1997 (recoupments).

Subsection 20-20(2) of the ITAA 1997 provides that an amount you have received as a recoupment of a loss or outgoing is an assessable recoupment if:

● you received the amount by way of insurance or indemnity, and

● you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it in an earlier income year, under any provision of this Act.

In your case, as you are entitled to claim a deduction for the deductible premiums you paid for the policy, and you have you received a refund of part of those premiums, the refunded amount is an assessable recoupment to the extent that the amount received is a refund of deductible premiums.