Edited version of private advice

Authorisation Number: 1051718759664

Date of advice: 20 July 2020

Ruling

Subject: Total and permanent disability (TPD) lump sum payment - Assessable Income.

Question 1

Is the lump sum payment received for Total Permanent Disability (TPD) assessable as ordinary income under section 6-5(2) of the Income Assessment Act 1997 (ITAA 1997)?

Answer

No

After considering the circumstances and the relevant factors the lump sum payment received is not considered ordinary income. Section 6-10(2) of ITAA 1997 states amounts that are not ordinary income, but are included in assessable income by another provision, are called statutory income. Lump sum payments are generally capital in nature and are potentially taxable under the capital gains tax provisions of the ITAA 1997.

Question 2

Is the Capital Gain on the lump sum payment disregarded under section 118-37(1) of the ITAA 1997?

Answer 2

Yes

After considering the circumstances and the relevant factors, we accept that capital gain is disregarded on the lump sum payment received for Total Permanent disability claim.

We conclude that the lump sum payment received is not assessable income.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You commenced personal and business insurance with an insurer in 20XX.

The business was originally set up as a partnership but it was restructured into a company (XYZ Pty Ltd) in 20XX.

The insurance policy was originally set up as part of a buy/sell legal agreement when you were part owner of a business. In the event of your death or on becoming totally & permanently disabled the policy would trigger a lump sum insurance payout for the value of your business share under the buy/sell agreement. Consequently, your business share would automatically revert to your business partner with you being compensated by the insurance payout. The cover was set up to provide a lump sum rather than any replacement of income.

The policy was set up as a non-superannuation policy.

The policy was updated in 20XX after an independent business valuation revalued the business at $X million.

Your share of the business was X% at the time, the cover was adjusted to $X million with CPI linked increases each year thereafter.

In 20XX you were diagnosed with an illness but you continued to work with XYZ Pty Ltd as a director and employee.

In 20XX an insurance review was carried out by a representative from your bank. They advised that both yours and your business partners insurances were set up incorrectly and were based on your previous business structure. The insurance policies needed changing to reflect the current structure, specifically in relation to the policy owner.

In 20XX you sent a letter (transfer of ownership) to your insurer requesting that the policy name be changed from the company to your own individual structure (Family Trust).

In 20XX, you received a letter from your insurer confirming that the change of ownership was complete.

In 20XX you lodged a customer claim form with your insurer as you were unable to work due to the illness.

The claim was approved under the 20XX policy which is the statement dated in 20XX. At this point the policy holder was your Family Trust. The insured person is you as an individual.

In 20XX your TPD Insurance option was approved by your insurer.

Your claim was admitted back to 20XX (the deemed date you were unable to work).

Your insurer confirmed: medical, financial and other information supported that you have been unable to follow your own occupation for a continuous period of three months due to your medical condition since 20XX. As a result, you are unlikely to be able to follow your occupation or any other occupation for which you are suited by education training and experience which would pay a remuneration greater than X% of your income during your last X months of working.

The lump sum TPD was awarded and the payment of $X was paid directly to you in 20XX.

The payment was related to your illness and inability to work. It was confirmed in documentation that it is for your personal needs and not connected with the business / company.

Your insurer confirmed that "TPD is a Lump Sum Benefit, not an income protection or loss of income benefit".

You will not receive any other sickness or accident benefits under the TPD insurance policy.

You paid for the insurance personally and did not claim any deductions for the insurance premiums.

The trust and company did not claim deductions for the insurance premiums.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 118-37