Private ruling: Insurance payouts
Date of advice: 13 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the trauma benefit payout you received under your employer’s insurance policy taxable? | A1: No. | Q2: Is the nursing care benefit you received under your employer’s insurance policy taxable? | A2: No.

Relevant facts and circumstances: You received a payout from your employer’s insurance policy. This payment constituted two benefits paid under the policy. The first payout was for a trauma benefit. The second payout was a nursing care benefit. This was payable when you were determined to be totally disabled for the purposes of the insurance policy and required hospitalisation during the waiting period. You received the following amounts: ● Trauma Benefit: $X ● Nursing Care Benefit: $Y The amounts were not part of a superannuation plan.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 118-37

Reasons for decision: Summary: Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997). 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. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts ( FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 ( Inkster ) and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411). In the event that payments are not found to be income, Section 118-37 of the Income tax Assessment Act 1997 (ITAA 1997) disregards a capital gain or capital loss made by an individual relating to compensation or damages received by that individual as a result of any wrong, injury or illness they or their relative suffered personally. A receipt of an amount under an insurance policy for a non-death benefit such as total and permanent disablement or trauma constitutes a form of compensation or damages covered by subparagraph 118-37(1)(a)(ii) where the amount is received for a wrong, injury or illness suffered personally by the recipient or the recipient's relative. | Detailed Reasoning - Application to your circumstances: You received a trauma benefit payout due to suffering a listed trauma event under the policy you were covered by. This payment was not to replace income; it was for a defined event. Therefore it will be considered a capital payment. Section 118-37 would then operate to disregard the capital gain or loss made on the payment. This results in the payment being non-assessable. | Detailed Reasoning - Question 2: The assessability of the nursing care benefit will be determined on similar principles to Question 1. You did not receive the payment to replace income and the payment itself did not have the characteristics of income. Therefore it will be considered a capital payment. Section 118-37 operates to disregard any capital gain in this circumstance. The result is that the nursing care benefit payment is non-assessable.