Edited version of your written advice

Authorisation Number: 5010048808824

Date of advice: 25 June 2018

Ruling

Subject: Trauma insurance payment

Question 1

Is the lump sum Trauma Insurance payment you received included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the lump sum Trauma Insurance payment you received included in your assessable income under the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997?

Answer

No.

Question 3

Will the capital gain you made when you received the Trauma Insurance payment be disregarded under section 118-300 of the ITAA 1997?

Answer

No.

Question 4

Will the capital gain you made when you received the Trauma Insurance payment be disregarded under section 118-37 of the ITAA 1997?

Answer

Yes.

Relevant facts and circumstances

You held an insurance policy as trustee for an insured person.

Your policy included an optional trauma component under which you were entitled to receive a lump sum payment should the insured person suffer a specified serious illness or injury.

You have never claimed a deduction for the premiums paid in respect of the policy.

Whilst premiums have been paid from the company bank account, the amounts have always been debited to a loan account of the insured person, and are not expensed and claimed by the company.

The insured person suffered a trauma which was covered under the insurance policy.

You lodged a claim with the insurer and you received a lump sum payment from the insurer.

You will pay the amount you received under the policy to the insured person.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 6- 5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 15-30

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-37

Income Tax Assessment Act 1997 section 118-300

Summary

Your right to seek compensation from the insurer was surrendered when you received the lump sum payment from the insurer. CGT event C2 happened at that time.

You can disregard the capital gain you made under section 118-37 of the ITAA 1997.

Detailed reasoning

Lump sum payment

Ordinary income

Subsection 6-5(2) of the 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 was not earned in the ordinary course of your business. Rather the lump sum relates to the personal circumstances of the nominated insured person under the policy. The payment is a one-off payment and thus does not have any element of periodicity, 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 your normal business activities.

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 the trauma suffered by the insured 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

Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the capital gains and capital losses provisions, commonly referred to as CGT. You make a capital gain or capital loss if a CGT event happens. Many CGT events involve a CGT asset and some relate directly to capital receipts.

There can be CGT consequences when you receive compensation. Taxation Ruling TR 95/35 gives the Commissioner's view on the taxation treatment of compensation receipts.

If a compensation payment is not in relation to an underlying asset, it relates to the disposal of a right to seek compensation (paragraph 11 of TR 95/35). A CGT event occurs when your ownership of the right to seek compensation ends by being released, satisfied or surrendered. Any capital gain arising on a disposal of that right is calculated using the cost base of that right.

In your case, CGT event C2 happened (section 104-25 of the ITAA 1997) when your interest in the right to seek compensation ended by being released, satisfied or surrendered. This occurred when the right to seek compensation from the insurer was surrendered following the receipt and acceptance of the payment under your insurance claim.

Exemptions

There are exemptions for certain capital gains made from CGT events happening in relation to insurance policies set out in sections 118-300 and 118-37 of the ITAA 1997.

In Taxation Determination TD 2007/4 Income tax: capital gains tax: is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression?, the Commissioner takes the view that the expression 'policy of insurance on the life of an individual' is not confined to the common law meaning of that term. The expression also includes a life insurance policy (as defined in subsection 995-1(1)) to the extent it provides for a payment to be made if an event happens that results in the death of an individual.

There is no policy reason why the exemption in section 118-300 of the ITAA 1997 should exclude situations where death of the insured happens because of a particular illness.

This means, for example, that a payment under a Term Life insurance policy may be exempt under section 118-300 of the ITAA 1997 if it is paid in respect of the death (rather than illness) of the insured and the other conditions in the provision are satisfied. However, a payment under such a policy will not be exempt if the payment is in respect of an illness or specified event.

Under subsection 118-37(1) of the ITAA 1997, a capital gain or capital loss you make from a CGT event relating to any of these is disregarded:

(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 (other than a trust that is a complying superannuation entity) 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.

You held the policy in trust for a shareholder. Therefore, subsection 118-37(1)(b)(ii) of the ITAA 1997 applies to your circumstances. As you received the compensation in a trustee capacity for a wrong, injury or illness a beneficiary has suffered personally the capital gain you made when CGT event C2 happened is disregarded.