Private ruling: One off trauma payment
Date of advice: 12 September 2017
Published: January 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is a lump sum insurance trauma payment from a claim assessable income? | A1: No

Relevant facts and circumstances: You are a resident of Australia for tax purposes. You were diagnosed with a medical condition which qualifies for a trauma benefit as outlined in your employer’s income protection insurance policy. Your employer had in force an income protection policy that provides you with: a) 70% of your pre-illness monthly salary up to a maximum of $X gross per month, during periods where you are unable to work due to illness, and b) A one-off trauma benefit equal to three times the maximum monthly income protection benefit, in your case, $X. The insurer has assessed you as eligible for the trauma benefit. The insurer has not yet determined your eligibility for any income protection benefits.

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 6-15(1) | Income Tax Assessment Act 1997 paragraph 118-37(1)(a)

Reasons for decision: Summary: 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. In your case the lump sum payment was not earned by you as it does not directly relate to services performed. Rather the lump sum relates to the loss of critical abilities. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. The payment was not expected. The payment was not relied upon, as it does not take into account whether or not you continue to work, and/or receive your normal salary. Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income. Amounts received in respect of personal injury/illness which is not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. As the amount received by you is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a CGT event (CGT event C2) happening to your right to seek compensation. However, paragraph 118-37(1)(a) 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 in your occupation'. Therefore, any capital gain made from the CGT event happening to your right to seek compensation is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. It is thus 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 gross amount you were entitled to receive is included in your assessable income.