Private ruling: Risk insurance policy benefits
Published: July 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the lump sum payment of benefits (crisis benefit and bed confinement benefit) that you received under the terms of your risk insurance policy assessable income? | A1: No.

Relevant facts and circumstances: You hold a risk insurance policy with an insurance company. The primary purpose of your risk insurance policy is to provide a benefit in the event of the life insured suffering an insured event (including death, sickness or injury preventing work). Your policy provides for payment of the benefit amount if an insured event (death, disability etc.) occurs. The benefit amount is specified in your policy schedule and increases every year. The policy provides for the payment of disability benefits during a period of incapacity, as well as other benefits including a crisis benefit and a bed confinement benefit. Under the terms of your policy: · the crisis benefit is payable when you suffer a condition covered under this benefit. · The bed confinement benefit is payable when you are totally disabled and have to be bed confined. Your policy states that the crisis benefit starts to accrue when you suffer a condition listed and will only stop when the payment period expires. You had suffered a condition listed under the crisis benefit component of your policy resulting in some time off work, and you made a claim under your risk insurance policy. Your insurer paid you a lump sum amount, which consisted of a crisis benefit and a bed confinement benefit.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-1(1) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 subsection 6-15(1) | Income Tax Assessment Act 1997 paragraph 118-37(1)(b)

Reasons for decision: Summary: The lump sum payment of benefits (crisis benefit and bed confinement benefit) that you received under the terms of your risk insurance policy is not ordinary or statutory income, and is therefore not assessable income. | Detailed Reasoning - Detailed reasoning: Assessable income consists of ordinary income and statutory income under subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Ordinary income: Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called 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 · are expected · are relied upon, and · have an element of periodicity, recurrence or regularity. The lump sum payment of benefits (crisis benefit and bed confinement benefit) were not earned by you as they do 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 personal services performed. The lump sum payment of benefits is not considered ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Statutory income: Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by specific provisions of the income tax law, are called statutory income. These specific provisions of the income tax law are listed in section 10-5 of the ITAA 1997, and include the capital gains tax (CGT) provisions. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The Ruling provides that an insured's right of indemnity under a policy of insurance falls within the definition of a right to seek compensation. The whole of the settlement amount is thus treated as capital proceeds from a CGT event happening to the taxpayer's right to seek compensation. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Therefore any capital gain made from the CGT event happening to your right to seek benefits (compensation) under your risk insurance policy is disregarded under paragraph 118-37(1)(b). The lump sum payment of benefits that you received under your risk insurance policy is therefore not statutory income. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount you received is included in your assessable income.