Private ruling: Assessability of a lump sum
Date of advice: 16 September 2020
Published: November 2020
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the lump sum payment (LSP) of $X you received to give up your right to take legal action exempt under subparagraph 118-37(1)(a)(ii) of the Income Tax Assessment act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You received a LSP of $X under a Deed of Release (the Deed) with the Insurer. You were insured with your former employer's corporate insurance policy (the Policy) through your former employer. You did not pay any sum to your former employer or the Insurer to be insured under the policy. You suffered injury in the workplace The Insurer paid you regular benefits for several years on the basis you were suffering a total disability under the Policy. The Insurer declined to make further payments to you alleging that you no longer suffered a total disability. You disputed the Insurer's decision through your lawyers (the Lawyers). The Insurer at all times denied your claim from the date they ceased paying. Despite the Insurer's extensive review of additional material following this date, including an independent medical opinion sought by you showing that you suffered psychological disorders and you could not return to your previous line of employment, the Insurer continued to deny they had an obligation to pay income benefits to you. The Insurer reaffirmed this to you in a letter stating that the claim was closed and you had no entitlement to benefits under the Policy. You state the only reason the Insurer agreed to pay you the LSP was to avoid adverse publicity. This is evidenced by the terms of the Deed of Release, particularly Confidentiality requirements that cover the facts of your case and the terms of settlement. You state that the payment made to you was not, therefore, a substitution for future income that would have been assessable income under the policy. Rather, it was a payment of a capital nature for severe distress suffered by you which is not an income payment. The Insurer effectively acknowledged the severity of the distress by the quantum of the payment. Your medical advisor confirmed the earlier opinion that you had a severe condition and that there was very little likelihood of the condition remitting while the case continued. Evidence that the Insurer at all times refused the claim and only entered mediation reluctantly and under legal pressure includes: The Deed of Release includes: under the Recitals: The Releasor disputes the Releasee's decision to the decline the Claim and contends that they continues to suffer Total Disability, and the Releasee continues to contend that the Releasor is not entitled to further benefits under the Policy (the Dispute). Without any admission of liability. the parties to this Deed have now agreed to resolve the Claim and the Dispute in the manner and on the terms set out in this Deed. And under AGREEMENT: The Releasee will pay to the Releasor the sum of $X including costs (the Agreed Sum). In consideration of this Deed and payment by the Releasee to the Releasor of the Agreed Sum, the Releasor, their executors, administrators, heirs and assigns forever release and discharge the Releasee from all causes of action, claims or demands which the Releasor now has or but for this Deed could have had against the Releasee whether in the present contemplation of the Releasor and/or the Releasee or otherwise that arise out of or are in any way connected with the Policy, the Claim, the Dispute, the above recitals or in connection with any other matter already recited in this Deed or in respect of any matter in any way related to any of those matters.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subparagraph 118-37(1)(a)(ii)

Reasons for decision: Summary: Subparagraph 118-37(1)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) states that: (1) A capital gain or loss you make from a CGT event relatedly directly to any of these is disregarded: (a) compensation or damages you receive for: ... (ii) any wrong, injury or illness you or your relative suffers personally; In the Deed of Release under the Recitals: The Releasor disputes the Releasee's decision to the decline the Claim and contends that they continues to suffer Total Disability, and the Releasee continues to contend that the Releasor is not entitled to further benefits under the Policy (the Dispute). Without any admission of liability. the parties to this Deed have now agreed to resolve the Claim and the Dispute in the manner and on the terms set out in this Deed. And under AGREEMENT: The Releasee will pay to the Releasor the sum of $X including costs (the Agreed Sum). In consideration of this Deed and payment by the Releasee to the Releasor of the Agreed Sum, the Releasor, their executors, administrators, heirs and assigns forever release and discharge the Releasee from all causes of action, claims or demands which the Releasor now has or but for this Deed could have had against the Releasee whether in the present contemplation of the Releasor and/or the Releasee or otherwise that arise out of or are in any way connected with the Policy, the Claim, the Dispute, the above recitals or in connection with any other matter already recited in this Deed or in respect of any matter in any way related to any of those matters. In signing the Deed of Release and accepting the agreed sum, you ceased to claim that you have a total disability for which the Insurer have a liability to make regular payments. Therefore, as the agreed sum was paid for ceasing to claim that you had an injury for which the Insurer were liable, the agreed sum was not compensation or damages you received for any wrong, injury or illness you suffered personally and is not exempt from CGT under subparagraph 118-37(1)(a)(ii) of the ITAA 1997.

The Insurer only agreed to participate in mediation of your claim after the Lawyers wrote a confidential letter to the Insurer. The Insurer then responded with a letter, a copy of which has been supplied. | The Insurer's denial of the claim in its letter, a copy of which has been supplied. | The Insurer did not change its position on receipt of your medical advisor's report. | The Insurer continued to deny the claim in its Position Paper, a copy of which has been supplied. | The Insurer demonstrated that they did not view the LSP to you as a benefit payment given they did not withhold tax from the payment.