Private ruling: Income - lump sum-legal action
Published: July 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Will any part of your settlement to release and extinguish your entitlement under an insurance policy constitute assessable income? | A1:  | Q2: Will any part of your settlement be assessable under the capital gains tax (CGT) provisions? | A2: 


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 Income Tax Assessment Act 1997 Subsection 6-15(1) Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

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 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 includes receipts that: · are earned · are expected · are relied upon; and · have an element of periodicity, recurrence or regularity. The lump sum payment you received is not income from rendering personal services, income from property or income from carrying on a business. The payment is also a one off payment and thus it does not have an element of recurrence or regularity. A payment of the nature described in the scheme generally bears the character of that which it is designed to replace. If the lump sum payment 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 Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling provides that an insured person'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 your right to seek compensation. The lump sum payment you received is for entering into a Release Agreement with your insurer for the purpose of surrendering your rights under the policy. Consequently, the lump sum payment is a capital receipt and is not ordinary income. Therefore the amount is not assessable under section 6-5 of the ITAA 1997. The disposal of an asset gives rise to a CGT event. 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. Applying paragraph 118-37(1)(b) to your circumstances, the lump sum would not be considered as an assessable capital gain. The insurer's purpose in making the lump sum payment is so you would surrender your rights, not only to recover any such benefits in the action, but also to claim any further benefits to which you might now or in the future have an entitlement under the policy. As these claims relate to your personal injury or illness, any capital gain or loss arising from the surrender of your rights under this policy will be disregarded. As such, this amount is 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 settlement amount received is included in your assessable income.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You were employed with a business. | As a result of your illness, you made claims against your employer's insurer. | You ceased employment and did not return to work. | You received disability payments under the policy. | A dispute arose about your entitlement to the benefits under the policy and the insurer ceased paying you benefits under the policy. | You commenced legal proceedings against the insurer. | · entitlements to disability payments under the policy | You accepted an offer to settle the court proceedings on the basis that: | · you discontinue legal proceeding against the insurer | · release and discharge the fund from all actions, claims or demands, costs and other liabilities now or at any time in the future | · you are no longer covered by the policy.