Edited version of private advice

Authorisation Number: 1051969970115

Date of advice: 27 April 2022

Ruling

Subject: CGT - Total Permanent Disability

Question 1

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

Answer

No.

Question 2

If the payment is not assessable income under section 6-5 of the ITAA 1997, will the payment result in a capital gains tax (CGT) event under Part 3-1 of the ITAA 1997?

Answer

Yes.

Question 3

Does section 118-37 of the ITAA 1997 apply to disregard the capital gain in full?

Answer

Yes.

Question 4

Can the 50% discount in Division 115 of the ITAA 1997 apply to reduce the capital gain?

Answer

Not applicable.

Question 5

Does the policy satisfy the active asset test in section 152-40 of the ITAA 1997?

Answer

Not applicable.

This ruling applies for the following period:

Year ended 30 June XXXX

The scheme commences on:

XX February XXXX

Relevant facts and circumstances

The X Family Trust (the Trust) operates a successful business.

AAA is a beneficiary of the trust and director of trustee company.

On DD/MM/YYYY, the Trust's insurance policy commenced with XXXX XXXX (the Policy).

The policy lists AAA as an individual insured for Life Cover and Total and Permanent Disability (TPD) Cover.

In YYYY, AAA suffered an accident resulting in an insurance TPD claim.

On DD/MM/YYYY, the insurer accepted the claim.

The claim was backdated to DD/MM/YYYY (the deemed date AAA was unable to work).

The Trust received a lump sum payment of $X.

The payment was not received to replace earnings of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-24

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 118-37

Income Tax Assessment Act 1997 section 152-40

Reasons for Decision

Question 1

Section 6-5 of the 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.

Application to your circumstances

In this case, the payment received is not income from rendering personal services, income from property or income from carrying on a business. The payment is also not earned, expected, or relied upon and, as a once off payment, does not have an element of recurrence or regularity. The payment is a capital receipt and is not ordinary income. Consequently, the amount is not assessable under section 6-5 of the ITAA 1997 and is capital in nature.

Question 2 and 3

Part 3-1 of the ITAA 1997 contains the capital gains and capital losses provisions. You make a capital gain or capital loss if a CGT event happens.

On receipt of the total and permanent disablement payment under the policy, CGT event C2 in section 104-24 of the ITAA 1997 happened because the rights, being the CGT asset, in respect of the permanent and total disablement sum under the policy ended. The trust will make a capital gain if the capital proceeds are more than the asset's cost base. The trust will make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Subsection 118-37(1) of the ITAA 1997 states a capital gain or capital loss can be disregarded if the payment relates to the following:

a)    compensation or damages you receive for:

(i)   any wrong or injury you suffer in your occupation; or

(ii)  any wrong, injury or illness you or your relative suffers personally

b)    compensation or damages you receive as the trustee of a trust for:

(i)   any wrong or injury a beneficiary of the trust suffers in his or her occupation; or

(ii)  any wrong, injury or illness a beneficiary of the trust, or the beneficiary's relative, suffers personally.

ba) a CGT asset you receive, as a beneficiary of a trust, from the trustee of the trust to the extent that the CGT asset is attributable to compensation or damages that the trustee receives as described in paragraph (b) for:

                                        (i)    any wrong or injury you suffer in your occupation; or

                                       (ii)    any wrong, injury or illness you or your relative suffers personally.

Application to your circumstances

In this case, the compensation was received by the trustee of the trust for a wrong or injury a beneficiary suffered in their occupation. Therefore, in accordance with paragraph 118-37(1)(b) of the ITAA 1997, the trust is entitled to disregard the capital gain.

Question 4 and 5

The questions are not applicable as section 118-37 of the ITAA 1997 allows the gain to be disregarded.