Private ruling: Taxation of insurance benefit received
Published: November 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the payment you received from your insurer as a trauma benefit assessable income? | A1: No. | Q2: Is the income protection insurance premium an allowable deduction? | A2: Yes, to the extent that the premiums provide for benefits of an income nature.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 15-30

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (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, expected, relied upon, and have an element of periodicity, recurrence or regularity. In your case, the compensation you received is not income from rendering personal services, income from property or income from carrying on a business. The payment is a one off payment and while it may be paid in six instalments, this does not amount to an element of recurrence or regularity. A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. Taxation Determination TD 93/58 states that any part of a lump sum compensation amount will only be assessable as ordinary income: (a) if the payment is compensation for loss of income only ..... , or (b) to the extent that a portion of the lump sum is identifiable and quantifiable as income. This is possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature. As your payment is not paid specifically as compensation for loss of income, we consider the payment is of a capital nature. Therefore, as the payment is capital in nature it is not assessable as ordinary income under section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 includes amounts of statutory income in assessable income, that is, amounts that are specifically listed as assessable income in Division 10 of the ITAA 1997. The two provisions applicable in your case are section 15-30 of the ITAA 1997 and Part 3-1 of the ITAA 1997. Section 15-30 of the ITAA 1997 operates to include in your assessable income an amount received as insurance or indemnity for loss of an amount if the loss amount would have been included in assessable income and the amount received is not assessable as ordinary income under section 6-5 of the ITAA 1997. Capital gains you make in respect of payments for personal injury are disregarded under section 118-37. Accordingly, the compensation payment that you will receive is not included in your assessable income. | Detailed Reasoning - Deduction: Section 8-1 of the Income Tax Assessment Act 1997 (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 High Court considered the deductibility of a personal disability insurance premium in FC of T v. Smith 81 ATC 4114; 11 ATR 538. In that case a medical practitioner employed by a hospital was allowed a deduction for premiums paid to secure a monthly indemnity against the income loss arising from the inability to earn. It was held that the premium under the policy was deductible even though the purpose of the expenditure was not the gaining of the income in that year. There was sufficient connection between the purchase of the cover against the loss of ability to earn and the consequent earning of assessable income and the outgoing was not of a capital, private or domestic nature. Therefore, premiums paid under an insurance policy that provides benefits of an income nature during a period of non-income earning (eg, disablement) are deductible under section 8-1 of the ITAA 1997. However, if the policy provides for benefits of an income and capital nature, only that part of the premium attributable to the income benefits is deductible. How to determine the amount of the premium that is apportioned to the capital benefit and the income replacement benefit should be worked out with information obtained from the insurer. There is no provision available for an arbitrary split of the premium.

Relevant facts: You took out a disability income insurance policy on yourself. This insurance provides a benefit of a monthly payment if you are unable to work due to illness or injury. You also included an optional extra cover with one of the covers being a trauma benefit. | The trauma benefit covers you if you have one of the listed medical conditions and pays you a lump sum payment. You are paid regardless of whether you are incapacitated for work. | You were recently diagnosed with one of the listed medical conditions in the trauma benefit cover. | You made a claim with your insurer and a claim was paid under the trauma benefits cover and you were paid a lump sum. | While you were incapacitated for work you took paid sick leave from your employer. | You pay a premium for your disability income insurance policy which includes the optional extra cover. Your insurer has advised that they are unable to distinguish a separate cost for the optional extra cover that you are paying for.