Edited version of private advice

Authorisation number: 1052249063994

Date of advice: 15 May 2024

Ruling

Subject: CGT - exemption

Question 1:

Are insurance proceeds received under a residential property insurance policy assessable to the Applicant under subsection 6-5(2) of the Income Tax Assessment Act 1997 when the policy was held in the name of their former spouse who was not listed on the property title?

Answer:

No.

Question 2:

If yes, are the proceeds reduced by the portion of the proceeds that the Applicant received no benefit from due to divorce proceedings, and the proceeds being included in the matrimonial asset pool and divided in the divorce settlement?

Answer:

As the answer to Question 1 is no, this is not required to be answered

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

Background information

In MM YYYY, the Applicant was the sole purchaser of vacant land.

In YYYY, a residential property was subsequently built, costing approximately $xxx (the property).

In MM YYYY, the property was destroyed by fire.

The Applicant's spouse at the time (the former spouse) held an insurance policy in respect of the property solely in their name.

Insurance proceeds of $xxx in relation to the destroyed property were initially transferred into a joint account held by the Applicant and the former spouse.

Costs to rebuild the property of approximately $xxx were incurred from YYYY until the time the couple separated in YYYY, leaving construction incomplete with extensive works remaining.

The property was not used to produce income and the property was also not eligible for the main residence capital gains tax (CGT) exemption.

CGT rollover relief was applied on the basis that costs were incurred prior to DD MM YYYY to commence rebuilding the property and over the preceding years the insurance proceeds would be used to finish rebuilding the property.

Over time, the remaining insurance proceeds that were not yet spent on rebuilding the property, approximately $xxx (the remaining insurance proceeds), were transferred by the former spouse from the joint account to accounts that were not in the Applicant's control.

The Applicant and the former spouse divorced. Pursuant to a Court ordered division of property:

•         the property was transferred from the Applicant to a family trust on MM YYYY.

•         the remaining insurance proceeds were divided equally between the Applicant and the former spouse in the division of matrimonial assets.

Information provided

You have provided a number of documents containing detailed information in relation to your application including:

•         Private binding ruling application dated DD MM YYYY.

•         Response to a request for further information dated DD MM YYYY.

•         Additional information provided in relation to the private binding ruling application dated DD MM YYYY.

We have referred to the relevant information within this document in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for Decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1:

Are insurance proceeds received under a residential property insurance policy assessable to the Applicant under subsection 6-5(2) of the Income Tax Assessment Act 1997 when the policy was held in the name of their former spouse who was not listed on the property title?

Summary

The tax treatment of insurance proceeds depends on what the insurance is paid to substitute.

The insurance proceeds the Applicant's former spouse received were compensation for the destruction of the Applicant's property and will not be assessable to the Applicant.

Detailed Reasoning

Subsection 6-5(2) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year, whether in or out of Australia.

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.

Ordinarily, an amount paid to compensate for loss or damage acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 24 FCR 53; Tinkler v. FC of T (1979) 40 FLR 116 and Case Y47 91 ATC 433).

Beneficial ownership

The concept of beneficial ownership is explained in Taxation Determination TD 2017/11 Income tax: who should be assessed to interest on bank accounts? (TD 2017/11). A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from an asset. Beneficial ownership can be different to legal ownership.

It is presumed that joint account holders beneficially own the moneys in equal shares unless there is evidence to the contrary.

Application to your circumstances

The compensation payment received by the former spouse, and transferred into the joint account, was proceeds from an insurance policy that the former spouse held solely in their name. The payment was not income from rendering personal services or income from property or income from carrying on a business. It was a 'once and for all' payment and, therefore, did not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arose from the damage and destruction of a property owned by the Applicant.

The former spouse received compensation for the destruction of a capital asset, being the property owned by the Applicant. Hence, the compensation will be generally regarded as a capital receipt unless the payment was to substitute for the loss of income. If the property was used to derive rental income, the payment would otherwise be assessable as ordinary income.

As such, the insurance proceeds are considered to be a capital payment. The former spouse who received the insurance proceeds as the policyholder is not required to report the insurance proceeds as ordinary income under subsection 6-5(2). It follows that the Applicant will not be assessed on the insurance proceeds.

The insurance proceeds were deposited into a joint account that the Applicant had a beneficial interest in. The court ordered division of property required the remaining insurance proceeds to be divided equally between the Applicant and the former spouse. The Applicant had a legal and beneficial interest in the funds in the joint bank account. No evidence has been provided to support that the Applicant did not have anything less than equal beneficial ownership in the funds held in this bank account. Therefore, the Applicant had an equal share in the account which included the payment for destruction of the property.

For the avoidance of doubt, the cash payment the Applicant received under the court ordered division of property, which includes the remaining insurance proceeds, is not assessable income. It is not considered to be ordinary income under subsection 6-5(2) as this amount is not a product of employment or services rendered, is not periodic, recurrent and relied upon. Therefore, the proceeds the Applicant received from the court ordered property settlement is not assessable income.

Question 2:

If yes, are the proceeds reduced by the portion of the proceeds that the Applicant received no benefit from due to divorce proceedings, and the proceeds being included in the matrimonial asset pool and divided in the divorce settlement?

Summary

As the insurance proceeds are not assessable to the Applicant, this question is not required to be answered.