Private ruling: CGT
Date of advice: 1 July 2020
Published: August 2020
Ruling period: 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1:  | A1:  | Q2:  | A2:  | Q3:  | A3:  | Q4:  | A4:  | Q5:  | A5: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are a company who operates as trustee for a unit trust (You). You insured Person A for Life, Total Permanent Disability (TPD) and Trauma, (The Policy). The Policy was provided by a life insurance company, and is Policy Number 12345. The Policy provided You with Key person insurance cover, for a capital purpose (Key Person insurance) for the amount of $XXX,XXX. The Key person insurance commenced on DDMMYYY7. Person A was diagnosed with a disease in YYY8 and You completed a claim against the Key person insurance policy. The claim was assessed and $XXX,XXX was paid to You under the Policy In the year YYY8. Person A did not die. Your representative applied for a private binding ruling on behalf of you with the view that the Key persons insurance payout is an active asset based on the opinion that the right to receive compensation is an active asset, and is not a financial instrument. The following was included in the original private ruling application; The unit holders for the unit trust are: Person A's Family trust and Person B's Family trust. In late YYY6, a property was purchased and developed, You commenced operations at these premises in the income year ended 30 June YYY8. You took out key person insurance policies on Person A and Person B for life total and permanent disability, trauma and business expenses and paid monthly premiums for the policies. The purpose of the key person (capital purpose) insurance policy was to ensure that You can be compensated for the loss of a key person in the event of death disability or illness. The private ruling application specifically concerns the lump sum payment of $XXX,XXX for trauma which was made to You under the Key person (capital purpose) policy (The Policy) in YYY8. The key person (capital purpose) policy provided You with $XXX,XXX for a capital purpose, in the event of death, TPD or trauma. With your application you provided copies of a Statement of advice (Statement) prepared for You. The statement includes: The terms of advice and a summary of recommended strategies and acceptance of the advice. Explanations of the discussion of your needs including Key person (capital purpose) policy. An outline of what You would like to achieve, including details of the capital purpose. Policy details for Key Person (capital purpose) of $XXX,XXX for Person A including Life, TPD and Trauma insurance. Schedule for Policy E 12345 - Which shows, Insured person as Person A You as the policy owner Benefits of Life Cover, TPD and Trauma Policy commencement date Completed Initial claim form Letter of acceptance of the claim from your life insurance company that shows a payout of policy number E 12345 for Trauma paid $XXX,XXX to the Your bank account. Your representative said that the funds were being held by You in a bank account pending the outcome of the private ruling, and that all of the funds will be used for the capital purpose.

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 102-5 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 110-45 | Income Tax Assessment Act 1997 Section 118-37 | Income Tax Assessment Act 1997 Section 118-300 | Income Tax Assessment Act 1936 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1936 Section 160M(7) | Income Tax Assessment Act 1936 Section 160ZB(1) Australian Accounting Standards Board's Standard 132

Reasons for decision: Detailed Reasoning - Question 1.: Trauma insurance policies generally provide for the payment of a set amount to the insured if the insured suffers a condition specified in the policy such as a heart attack, cancer, or stroke. Key person insurance is life insurance that is taken out to cover the "key person," usually a director, owner, or partner, in a business. It pays a benefit to the company if illness or injury of that "key person" result in losses to the company. The principles for assessing the proceeds of Key person insurance are generally the same as those that apply to compensation in general - the receipts will be income if they are compensation for a loss of income and will be capital if they are compensation for loss of a capital item. For further clarification of the taxation consequences of the proceeds of a Key person policy we look to Taxation Ruling IT155 Key man insurance - assessability of proceeds and deductibility of premiums for the ATO view. Paragraph 5 and 7 of IT 155 says 5. In the Carapark Holdings case, it was held that an insurance payment received by the taxpayer as policy holder following the accidental death of a subsidiary company's employee constituted assessable income of the taxpayer. As an accident policy was involved, the decision itself is not an impediment to the continued application of the established practice but, in reaching its decision the Court carefully considered the facts in order to determine the purpose for which the taxpayer entered into the insurance contract. 7. In deciding whether the proceeds of an accident or term policy are assessable income under section 25 of the Act it would be appropriate to work on the broad proposition, as the High Court did in the Carapark Holdings case, that - "... in general, insurance moneys are to be considered as received on revenue account where the purpose of the insurance was to fill the place of a revenue receipt which the event insured against has prevented from arising or of any outgoing which has been incurred on revenue account in consequence of the event insured against, whether as a legal liability or as a gratuitous payment actuated only by consideration of morality or expediency." Section 6-5 of the ITAA 1997 provides that the assessable income of Australian residents includes the ordinary income derived directly or indirectly from all sources. Ordinary income includes income from rendering personal services, income from property and income from carrying on a business. A revenue purpose exists where there is a nexus between the amount of the insurance benefit and the expected quantum of lost profits. Taxation Determination TD 95/42 Income tax: can a premium paid by an employer on a trauma insurance policy in respect of an employee be an allowable deduction to the employer? , says that where a trauma policy is a) owned by an employer; b) the employer is the beneficiary of the policy; c) the premium is paid for a revenue purpose; and d) the purpose of the policy is to advance the business ends of the taxpayer; then the premium is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Where compensation is received in these circumstances, the lump sum would constitute assessable income to the employer under section 6-5 of the ITAA 1997. TD 95/42 provides that where any benefit expected or obtained by the employer from the insurance policy was to cover the loss of profit, either due to a reflection of reduced income or increased expenditure, resulting from the loss of the employee, a revenue purpose may exist. Taxation Determination TD 95/41 Income tax: is a premium payable on a trauma insurance policy by a self-employed person or an employee an allowable deduction to the self-employed person or employee? says that where the purpose of the policy provides a capital amount to the insured, a deduction is not allowable. Therefore, if the policy does not replace earnings lost by the taxpayer if the insured suffers a specified medical condition, the benefits payable are not assessable income under section 6-5 of the Income Tax Assessment Act 1997 . 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 is section 102-5 (capital gains). The purpose of the insurance is a relevant consideration in deciding whether the proceeds from an insurance policy are on revenue or capital account. That is, what is being insured and the nature of the loss that the insurance receipt is compensating for. To establish the purpose IT 155 suggests we look at all the surrounding circumstances. In paragraph 10, IT 155 states that minutes or book entries may assist in establishing the purpose of the policy. In addition the purpose for which the proceeds are used is also relevant. Statements made of the taxpayer's intentions are not conclusive as the taxpayer might change his plans over time. In the situation where insurance was taken out for the purposes of payment of a debt, if the debt was cleared prior to the proceeds being received this purpose could be discounted as irrelevant as the circumstances have changed (paragraph 11 of IT 155). Capital Purpose Your representative has stated that the insurance policy was taken out for a capital purpose. A Statement of Advice (the Statement) prepared for You, the Key person (capital purpose) policy details for Person A and payment advices were provided. The Statement covers the:- • terms of advice and a summary of recommended strategies and acceptance of the advice, • explanations of the discussion of your needs including Key person (capital purpose) policy, and, • an outline of what You would like to achieve, including details of the capital purpose. Policy details for Key Person (capital purpose) of $XXX,XXX for Person A including Life, TPD and Trauma insurance. The initial claim form was also provided and shows a claim was made E 12345 policy. A letter of acceptance as provided and shows a payment for policy number E 12345 for Trauma paid $XXX,XXX to the Your bank account. Your representative said that the funds were being held by You in a bank account pending the outcome of the private ruling, and that all of the funds will be used for the capital purpose. The evidence shows the purpose for the specific trauma policy concerned being taken out is not to fill the place of a revenue receipt but for a capital purpose. Similarly, the proceeds of the insurance policy are not to cover the loss of profit but intended to be for a capital purpose. Consequently, this is a capital purpose and not a revenue purpose. 2. Does the lump sum payment of $XXX,XXX received by You under the key person (capital purpose) policy give rise to a capital gain from CGT event C2 in the amount of $XXX,XXX? Taxation ruling TR 95/35 - Income tax: capital gains: treatment of compensation receipts contains the Commissioners view on compensation receipts. TR 95/35 states: A compensation receipt, or compensation, includes any amount (whether money or other property) received by a taxpayer in respect of a right to seek compensation or a cause of action, or any proceeding instituted by the taxpayer in respect of that right or cause of action, whether or not: ¢in relation to any underlying asset; ¢arising out of Court proceedings; or ¢made up of dissected amounts. The insurance proceeds are a compensation receipt. The particular asset in respect of which compensation has been received by the taxpayer may be: ¢an underlying asset ¢a right to seek compensation or ¢a notional asset, in terms of subsection 160M(7). In determining which is the most relevant asset, it is often appropriate to adopt a 'look through' approach to the transaction or arrangement which generates the compensation receipt. This approach is regarded by the Commissioner as the most appropriate basis on which to determine whether any capital gain arises on the disposal of any asset of the taxpayer. Only if the insurance or settlement proceeds do not relate to the disposal of part or all of any underlying asset is it necessary to consider the policy rights or the right to seek compensation as the relevant asset. In this case, the insurance proceeds do not relate to the disposal of an underlying asset. TR 95/35 continues at paragraph 11: 11. If the amount of compensation is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. Accordingly, any capital gain arising on the disposal of that right is calculated using the cost base of that right. TR 95/35 states the right to seek compensation is an asset for the purposes of the CGT provisions (paragraph 34). Section 104-25 of the ITAA 1997 provides a CGT event C2 happens if ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled or (b) being released, discharged or satisfied or (c) expiring or (d) being surrendered, abandoned or forfeited or (e) if the asset is an option - being exercised or (f) if the asset is a convertible interest - being converted. The right to seek compensation is disposed of when the taxpayer agrees to a release, discharge, satisfaction or surrender of his or her right to seek compensation. This is generally at the final point of settlement of the claim and receiving the compensation (paragraph 158 of TR 95/35). The right to seek compensation from the insurer was surrendered following the settlement of the insurance claim and receipt of the proceeds. At that point, CGT event C2 happened. A capital gain arises if the capital proceeds from the right ending exceed the cost base of the right. Under section 110-25 of the ITAA 1997 the cost base of a CGT asset is made up of five elements: ¢money or property given for the asset ¢incidental costs of acquiring the CGT asset or that relate to the CGT event ¢costs of owning the asset ¢capital costs to increase or preserve the value of the asset or to install or remove it ¢capital costs of preserving or defending ownership of, or rights to, the asset. Section 110-45 of the ITAA 1997 prevents some expenditure from forming part of the cost base, or of an element of the cost base, of a CGT asset acquired after 7.30pm on 13 May 1997. Subsection 110-45(1B) states: Expenditure does not form part of the second or third element of the cost base to the extent that you have deducted or can deduct it. The premiums paid for the insurance policy are not deductible to You as the premium is not paid for a revenue purpose (paragraph 1 of TR 95/42). Additionally, paragraph 168 of TR 95/35 states that, in relation to a disposal of the right to seek compensation, the creator of the asset is deemed to acquire the asset and to have owned it immediately before the vesting time. For a right to seek compensation the vesting time is at the time of breach. The newly created asset is disposed of on the release, discharge, satisfaction or surrender of his or her right to seek compensation. Consequently the asset is created immediately before the vesting time. There are no incidental costs associated with the asset. Therefore in this case, the capital proceeds, and the capital gain, is $XXX,XXX - the amount received by You. | Detailed Reasoning - 3. Is the capital gain exempt under section 118-300 or 118-37 of the ITAA 1997 or any other provision?: Section 118-300 of the ITAA 1997 Section 118-300 of the ITAA 1997 excludes from the application of the CGT provisions certain capital gains or capital losses relating to the taxpayer's interests under insurance policies, in specified circumstances. The exemption applies only if all of the following conditions are satisfied: ¢there is a capital gain or capital loss ¢the capital gain or loss arises from either A1, B1, C2, E1, E2, E3, E5, E6, E7, E8, I1, I2, K3 and/or K4 capital gains event. ¢the CGT event relates to a CGT asset that is the taxpayer ' s interest in rights under a general insurance policy, a policy of insurance on the life of an individual or an annuity instrument. For the purposes of s118-300, the CGT asset must be the taxpayer ' s interest in rights under the policy or instrument ¢the CGT event occurs in one of the specified circumstances - Item 1. General and life insurance policy or annuity instrument - exemption for insurer or issuer - Item 2. General insurance policies - exemption for insured if the loss or gain on the insured property would be CGT-exempt - Item 3. Life insurance policies and annuity instruments - exemption for original owner - Item 4. Life insurance policies and annuity instruments - exemption for subsequent owner for no consideration - Item 5. Life insurance policies or annuity instruments - exemption for trustees of complying superannuation entities - Item 6. Life insurance policies or annuity instruments where liabilities discharged out complying superannuation or segregated exempt assets - exemption for life insurance companies - Item 7. Insurance policy for an individual ' s illness or injury - exemption for trustee of a complying superannuation entity - This exemption applies to capital gains or losses made when a CGT event happens to an interest in an insurance policy for an individual ' s illness or injury, and the capital gains or losses are made by the trustee of a complying superannuation entity for the income year in which the CGT event happened. 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? Says The expression 'policy of insurance on the life of an individual' in section 118-300 of the (ITAA 1997) includes, but is not limited to, life insurance policies within the common law meaning of that term. The expression also includes other life insurance policies as defined in subsection 995-1(1) but only to the extent that those policies provide for a sum of money to be paid if an event happens that results in the death of an individual. An exemption is not available under section 118-300 as none of the exemption categories have been met. The key person policy is not a life policy, but a trauma policy. The insured (Person A) is not the owner of the policy nor does he have a right to the policy, the owner of the policy is not an individual. A trauma policy may be exempt under section 118-300 if it is paid in respect of the death (rather than illness) of the insured and the other conditions in the provision are satisfied. A payment under such a policy in respect of an illness will not be exempt under section 118-300, although it may be exempt under section 118-37 (paragraph 26 of TD 2004/7 Income 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? ). Section 118-37 of the ITAA 1997 Under subsection 118-37(1) of the ITAA 1997, a capital gain or loss from a CGT event is disregarded if it relates to the following (relevant to this case): (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 a 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 beneficiaries 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. Tax Determination TD 14 Capital Gains: Will payments made under Accident & Health Assurance policies be exempt from CGT? States that Payments made to the holders of such policies in respect of personal injuries to themselves are regarded as "compensation" and will not give rise to either capital gains or losses (subsection 160ZB(1)). 2. This treatment will also apply to payments made to a trustee for a taxpayer who has been injured. The wording 'personal injuries to themselves' highlights that the exemption applies to individual policy holders who have personally been injured. Paragraph 2 of TD 14 merely extends the exemption to include payments made to trustees that relate to individual taxpayers who have been personally injured. This view is supported by the Explanatory Memorandum to Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014 which introduced amendments to the exemption contained in the ITAA 1997 (post repeal of the provisions in the ITAA 1936). It states at paragraph 3.4: It was intended that trustees or beneficiaries who receive compensation or damages in respect of certain events (such as an injury an individual suffers at work) or in respect of certain policies of insurance (such as illness, injury or death) not be subject to CGT. However, the express wording of the relevant provisions in the ITAA 1997 has created uncertainty about this treatment. This measure confirms the existing administrative treatment in respect of compensation and insurance policy receipts. 118-37(1)(b)(ii) clearly states the exemption applies to the trustee of a trust in relation to a beneficiary of the trust (or a relative of that beneficiary) for an illness suffered 'personally'. This confirms the views contained in TD 14 and the intention of the measure that it applies to beneficiaries who are individuals. That is, natural persons. TR 95/35 at paragraph 216 also supports this view. It states: ...We consider that the use of 'his or her' in connection with a taxpayer suggests that the application of subsection 160ZB(1) is intended to be limited to taxpayers who are natural persons. Similarly, we consider that compensation received by a trustee in his or her capacity as trustee does not fall within the scope of subsection 160ZB(1)... Whilst that paragraph continues: Of course, amounts received by a trustee in respect of the surrender of a personal injury claim of the trustee continues to be exempt the corresponding provision in the ITAA1997 (paragraph 118-37(1)(b)(ii)) stipulates the exemption applies to an amount that is received in 'relation to a beneficiary of the trust (or a relative of that beneficiary) for an illness suffered 'personally'. The following is an example of the application of the exemption to an individual beneficiary outlined in the Explanatory Memorandum: | Detailed Reasoning - Example 3.1: Compensation received by trustee: Robert is the beneficiary of ABC trust, which was established after Robert fell off a roof whilst working for Roofing Inc and suffered serious injuries. Patrick, as trustee of ABC trust, seeks compensation on behalf of Robert from Roofing Inc's insurance company, and receives compensation for the accident. The capital gain made by Patrick in relation to the compensation received is disregarded. You have received compensation as trustee of the trust. The beneficiary of the trust is the unit trust. The capital gain is disregarded if it applies to an individual beneficiary due to the use of the words 'his' and 'her', 'suffers personally' and 'your relative'. The compensation payment received by You is not for a wrong, injury or illness a beneficiary (or their relative) of the trust suffers 'personally', therefore the exemption would not apply. Additionally, Person A (who suffered the illness) is a discretionary beneficiary of the unit trust that is a beneficiary of You. There is no provision, nor intention of the measure, to apply by a 'look through' approach that would mean the exemption has a flow on effect to a non-individual discretionary beneficiary of a beneficiary of a trust. The payment must be received by the relevant trustee for a wrong, illness or injury suffered by a natural person beneficiary for the exemption to apply. Therefore, the capital gain made by You from the capital proceeds of $XXX,XXX is not disregarded under 118-37(1)(b)(ii) of the ITAA 1997. 4. If the capital gain is not exempt are You able to claim the small business 50% CGT concession on the basis that the CGT asset, being the right to receive compensation, is an active asset? | Detailed Reasoning - Right to seek compensation: As previously discussed, TR 95/35 at paragraph 34 states the right to seek compensation is an asset for the purposes of the CGT provisions. TR 95/35 at paragraph 168 states the asset is acquired immediately before the vesting time. The vesting time is generally at the time of creation ie for a right to seek compensation this is at the time of breach. Further TR 95/35 at paragraph 185 states, in relation to compensation received under an insurance policy, the insured's right under the policy is an asset, and for the purposes of this Ruling, falls within the definition of a right to seek compensation. This right of indemnity is acquired by the insured when the triggering event of the policy occurs. The payment of the claim by the insurer results in the disposal of the right of the insured. | Detailed Reasoning - Active Asset: Section 152-35 of the ITAA 1997 outlines the active asset test. It states: | Detailed Reasoning - 152-35(1): A CGT asset satisfies the active asset test if: (a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period specified in subsection (2); or (b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the period specified in subsection (2). | Detailed Reasoning - 152-35(2): The period: (a) begins when you *acquired the asset; and (b) ends at the earlier of: (i) the *CGT event; and (ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business. The meaning of an active asset is outlined in section 152-40 of the ITAA 1997. It provides: | Detailed Reasoning - 152-40(1): A CGT asset is an active asset at a time if, at that time: (a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by: (i) you; or (ii) your affiliate; or (iii) another entity that is connected with you; or (b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. Note 1: An intangible asset need satisfy only paragraph (a) or paragraph (b). Note 2: The meaning of connected with in subparagraph (1)(a)(iii) and paragraph (b) is affected by section 152-78. Note 3: An example of an asset that is inherently connected with a business is goodwill or the benefit of a restrictive covenant. Active asset exception The right to compensation from akey person insurance is a financial instrument and is therefore an active asset exception as per subsection 152-40(4)(d) of the ITAA 1997. Subsection 152-40(4) reads:- However, the following CGT assets cannot be active assets: (a) interests in an entity that is connected with you, other than shares and interests covered by subsection (3); (b) shares in a company, other than: (i) shares in a *widely held company that are covered by subsection (3), (3A) or (3B) and held by a CGT concession stakeholder of the company; and (ii) shares in any other company that are covered by subsection (3), (3A) or (3B); (c) interests in a trust, other than: (i) interests in a trust to which subsection (5) applies that are covered by subsection (3), (3A) or (3B) and held by a CGT concession stakeholder of the trust; and (ii) interests in any other trust that are covered by subsection (3), (3A) or (3B); (d) financial instruments (such as loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts and a right or option in respect of a share, security, loan or contract); (e) an asset whose main use by you is to derive interest, an annuity, rent, royalties or foreign exchange gains unless: (i) the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or (ii) its main use for deriving rent was only temporary. The description of financial instruments outlined in paragraph152-40(4)(d) are not an exhaustive list evidenced by the words 'such as' used in the provision to denote the examples that follow it are examples of financial instruments. Paragraph 152-40(4)(d) states financial instruments cannot be an active asset and this includes 'a right or option in respect of a ...contract'. Taxation Ruling TR 95/35 states at paragraph 183: Compensation received under a policy of insurance also relates to a right to seek compensation. On taking out a policy, an insurer enters into a contract under which it agrees to indemnify an insured against claims made against the insured for liability arising out of their negligence (eg as the operator of a motor vehicle, or as the provider of negligent advice). If the negligence of the insured results in injury or loss to a claimant which is covered by the policy, the claimant has a right to collect in damages from the insured, and the insured has a right under the policy to compel the insurer to meet the claim. Although the term ''financial instrument'' is not defined in the ITAA 1997, the Australian Accounting Standards Board's standard AASB 132 contains the following definitions: ¢A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. ¢A financial asset includes any asset that is 'a contractual right to receive cash or another financial asset from another entity'. In this case, the right to seek compensation arises from the contract of insurance entered into between You and the insurer where the insurer agrees to pay an amount of compensation to You in the event of the death, disability or illness of a 'key person' (Person A). Consequently, the right to seek compensation cannot be an active asset as it is a right in respect of a contract and therefore a financial instrument. Furthermore, even if the right to seek compensation wasn't a financial instrument, it is not considered an active asset. An intangible asset must be either used or held ready for use in the course of carrying on a business or inherently connected with the business to be considered an active asset. You do not use or hold ready for use the key person insurance, or its right to receive compensation in the course of carrying on of the business. It is not sufficient that the asset merely be used 'in relation to' the course of carrying on a business or for purposes associated with the business. It is necessary for the use to have 'a direct functional relevance to the carrying on of the normal day-to-day activities of the business' that were directed to the gaining or production of assessable income (FC of T v Eichmann 2019 ATC 20-728; [ 2019] FCA 2155 ). It is also not inherently connected with the business. To be inherently connected with the business we look for assets that are a permanent or characteristic attribute of the business; that is required as, or as a result of, its normal course of its operations. The legislations gives the examples of goodwill generated by the business or the benefit of a restrictive covenant is an intangible CGT asset that is inherently connected to the business. Other examples include trade debtors and poker machine licences. The service business does not require key person insurance or its right to compensation in its day to day operations, there is no legal requirement for a service business to have Key person insurance, or the right to the compensation in order to function. Key person insurance (and its rights) are not generated by your service business, it is a right to compensation paid to You should Person A become ill, it is not an enduring or typical characteristic of a service business. Key person insurance, and its subsequent rights are not inherently connected with Your service business. 5. If You are able to claim the small business 50% CGT concession, can the beneficiaries of Person A's Family Trust and Person B's Family Trust apply the small business 50% reduction to the capital gain which is distributed to them (after applying any prior or current year capital losses)? The question is no longer required to be considered as the answer to question 4 is ''no''.

Subject: CGT: Question 1 Is the $XXX.XXX received by you under the key person (capital purpose) policy capital? | Question 2 Does the lump sum payment of $XXX.XXX received by you for Trauma under the key person (capital purpose) policy give rise to a capital gain from CGT event C2 in the amount of $XXX.XXX? | Question 3 Is the capital gain exempt under section 118-300 or 118-37 of the ITAA 1997 or any other provision? | Question 4 If the capital gain is not exempt under section 118-300 or section 118-37 of the ITAA 1997, are you able to claim the small business 50% CGT concession on the basis that the CGT asset, being the right to receive compensation, is an active asset? | Question 5 If you are able to claim the small business 50% CGT concession, can the beneficiaries of Trust A and Trust B apply the small business 50% reduction to the capital gain which is distributed to them (after applying any prior or current year capital losses)?