Private ruling: Lump sum payment to deceased estate
Date of advice: 21 December 2023
Published: 29 April 2024
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the lump sum payment to the Estate of the deceased be taxable as ordinary income under Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. The lump sum payment received as a death benefit isn't included in your assessable income as ordinary income under section 6-5. Compensation and insurance payments take the character of what they replace. We've characterised the death benefit as compensation for injury or illness, rather than compensation for lost income. | Q2: Will any capital gain arising from the payment be disregarded under Section 118-137 of the ITAA 1997? | A2: Yes. Section 118-137 will apply to exclude any capital gain happening when you received the death benefit. Insurance payouts are compensation for certain events happening. The relevant event was a medical condition, which is an injury or illness which the deceased suffered personally. The CGT event happened when the insurer discharged or satisfied its obligations by making the compensation payment for the medical condition, so it 'relates directly' to that event. Paragraph 118-37(1)(a) is met, so you can disregard any capital gain and exclude it from your assessable income.

Relevant facts and circumstances: The deceased passed away from an illness. The deceased had an income protection policy, and the insured monthly benefit was for $X. The policy states that "If the Life insured dies while the Income Protection Plan is in force We will pay You or Your nominated beneficiary X times the Insured Monthly Benefit up to a maximum death benefit of $X". A lump sum was paid to the Estate of the deceased after their passing.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Section 118-137