Edited version of your written advice

Authorisation Number: 4140047769792

Date of advice: 5 March 2018

Ruling

Subject: Insurance Income – life insurance policy – injury benefit – deductibility of premiums

Question 1

Is the lump sum payment you received under your life insurance policy included in your assessable income?

Answer

No.

Question 2

Are you entitled to a deduction for the premiums paid in relation to your life insurance policy?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2018

The scheme commenced on

1 July 2017

Relevant facts

You are the owner of a life insurance policy.

You suffered an injury.

You claimed under the Accidental Injury Benefit part of the policy and it was approved.

You were paid a lump sum Accidental Injury Benefit in accordance with the policy.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 6-10

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

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 15-30

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

Ordinary income

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.

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 was not earned by you as it does not directly relate to services performed. Rather the lump sum relates to personal circumstances that have arisen during your life. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the investment in insurance, rather than from a relationship with any personal services performed.

Consequently, the payment you received under the policy is not ordinary income and is therefore not assessable under section 6-5(2) of the ITAA 1997.

Statutory income

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 are section 15-30 (Insurance or indemnity for loss of assessable income) and section 102-5 (capital gains).

Insurance or indemnity for loss of assessable income

Your assessable income includes an amount you receive by way of insurance or indemnity for the loss of an amount (the lost amount) if the lost amount would have been included in your assessable income and the amount you receive is not assessable as ordinary income under section 6-5 of the ITAA 1997 (section 15-30).

The lump sum payment you received was not a payment for lost income. The payment was for your injury and is considered to be capital in nature. As such, the payment is not included in your assessable income under section 15-30 of the ITAA 1997.

Capital gains tax

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 was an intangible CGT asset and your ownership of that asset ended when you received the lump sum payment. At that time CGT event C2 happened and you made a capital gain.

However, a capital gain or loss you make from a CGT event relating directly to compensation you receive for any wrong, injury or illness you suffer personally, is disregarded (subparagraph 118-37(1)(a)(ii) of the ITAA 1997).

The lump sum payment you received under the insurance policy is not assessable under subsection 6-5(2) of the ITAA 1997 as it was not ordinary income. The payment is also not statutory income as it is not assessable under section 15-30 and the capital gain you made is disregarded under subparagraph 118-37(1)(a)(ii). Subsection 6-15(1) provides that if an amount is not ordinary or statutory income it is not assessable income.

Consequently no part of the lump sum payment is included in your assessable income.

Life insurance premiums

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

The expenses incurred for your insurance have no direct connection to the gaining or producing of your assessable income. The purpose of the expense is to cover you in case of an accident. There is insufficient connection to the gaining or production of your assessable income for a deduction to be allowed as the expenditure is too remote.

Therefore, you are not entitled to a deduction for your life insurance premiums under section 8-1 of the ITAA 1997.