Private ruling: Assessable income - payments received for a crisis recovery benefit
Date of advice: 9 August 2022
Published: November 2022
Ruling period: 1 July XXXX to 30 June XXXX
Date scheme commenced: 1 July XXXX

Ruling: Q1: Should the lump sum payment received as a 'crisis recovery benefit' payment be included in your assessable income? | A1: No | Q2: Should the 'no-claims bonus' payment be included in your assessable income? | A2: No | Q3: If the 'crisis recovery benefit' payment is to be included in your assessable income, which financial year does it apply to as the period for which you are being paid spans X income years? | A3: Not applicable because the answer to Questions 1 and 2 is 'no'. | Q4: Will any capital gains arising from the 'crisis recovery benefit' be disregarded? | A4: Yes

Relevant facts and circumstances: 1. You took out an insurance policy. That insurance policy was described by the insurer's product disclosure statement as an income protection plan with extra features described as optional benefits. 2. You have provided a copy of the relevant product disclosure statement. We summarise relevant information from that disclosure statement in the Table. Table: summary of the product disclosure statement Topic Details Income protection plan An income protection benefit (including an optional benefit) will provide you with a monthly income if you become disabled due to injury or sickness. To be eligible you must be in full-time employment, working at least 25 hours per week, for 48 weeks per year, excluding public holidays. Benefits are paid from the expiry of a waiting period until the end of the benefit period. The monthly benefit is determined at an agreed value, worked out according to your income. It can be capped in some situations. Optional benefits include crisis recovery benefits. The crisis recovery benefit is payable only once during the term of the income protection (plus optional benefit) policy. Benefit payments stop on the earliest to occur of the following events: Crisis recovery A crisis recovery benefit will pay a lump sum if you are diagnosed with one of the illnesses listed. The lump sum is equal to six times your insured monthly benefit. The lump sum payment is in effect the payment of the first six monthly benefit payments under the income protection benefit which otherwise may have become payableas a result of the insured's disablement. You are eligible for a no-claim bonus if you don't make a claim for at least X years after purchasing your optional benefit. The bonus is X% if you have X claim-free years. 3. You suffered a medical condition during the relevant income year. You attended hospital and were discharged a few days later. 4. You returned to part-time work about a fortnight after you suffered the medical condition, working about X% of the hours that you worked before the incident. 5. You made a claim under your insurance policy. The insurer accepted the claim by a letter, agreeing to pay a lump sum as a crisis recovery benefit. The insurer made a payment of $X to you during the relevant income year. 6. This letter said: • the insurer had assessed your claim, and approved you for income protection benefits for the period you were unable to work as a result of your condition • your insured monthly benefit was $X • you were eligible to increase the insured monthly benefit by X% under a no-claims bonus, bringing the insured monthly benefit to $X ($X*[100+X]%) • you had elected to have a crisis recovery benefit under your policy • the crisis recovery benefit entitled you to a lump sum payment in the event you were diagnosed with one of the eligible crisis events • your condition entitled you to a lump sum payment equivalent to six times your insured monthly benefit • the insurer had made a total payment of $X to you, representing a six-month period that spanned X income years • the insurer had been advised that you returned to work at full capacity around a fortnight after you suffered the medical condition.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Section 6-10 | Section 104-25 | Section 108-5 | Section 118-37

Reasons for decision: Summary: 7. No. The lump sum payment received as a 'crisis recovery 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 crisis recovery benefit as compensation for injury or illness, rather than compensation for lost income. | Detailed Reasoning - Detailed reasoning: 8. Assessable income includes ordinary income (under section 6-5) and statutory income (under section 6-10). | Detailed Reasoning - Ordinary income under section 6-5: general principles: 9. Ordinary income under section 6-5 covers 'income according to ordinary concepts'. This phrase isn't defined, but there's a substantial body of case law relevant to determining whether receipts are income for tax purposes. 10. The ATO has some guidance about the meaning of ordinary income. For example, TR 2006/3 [1] (at paragraph 85) and TD 2016/18 [2] (at paragraph 15) state a few propositions taken from case law. Amounts may be income if they are: • paid periodically, regularly, or recurrently • relied on by the recipient for regular expenditure • are the product of the recipient's employment or services • compensate for lost income or serve as a substitute for other income. 11. On the other hand, compensation for the loss of a capital asset or loss of future earning capacity may be capital, and not ordinary income: see TR 2006/3 (at paragraph 85) and TD 2016/18 (at paragraph 21). 12. The same ATO guidance also lists some other some other principles (derived from case law) relevant to determining the character of receipts as either income or capital. We summarise some of these points from TR 2006/3 at paragraph 85: • the nature of a payment is determined by examining the character of the payment in the hands of the recipient (not the payer) • all facts and the taxpayer's total situation must be considered • the measure used to calculate the payment isn't decisive • lump sums can still be income in some circumstances. | Detailed Reasoning - The compensation/replacement principle: compensation payments take on the character of what they replace: 13. Here, if we momentarily disregard the compensation principle, the crisis recovery payment has few of the indicia of ordinary income. • It's a one-off, lump sum payment. • It isn't a reward for services or employment. • It's paid when an injury happens. • It seems unlikely that you would expect or rely upon the payment for usual expenditure before it happens. 14. Insurance is clearly compensation. Therefore, the crisis recovery benefit payment might be assessable depending on how we characterise what the compensation is for. | Detailed Reasoning - ATO's application of the compensation or replacement principle: compensation for income is income, but compensation for injury is capital.: 15. The ATO has addressed how the compensation or replacement principle applies applied to receipts connected with injuries in public guidance. • TD 93/58 [3] says that a lump sum compensation payment may be assessable where it's compensation for loss of income. Where only part of the payment is compensation for lost income, that component may be assessable to the extent that portion is identifiable and quantifiable as income. • TD 95/41 [4] says that benefits payable under a trauma insurance policy aren't assessable income. Their purpose is to provide a capital amount if the insured suffers a specified medical condition, not to replace lost earnings. | Detailed Reasoning - Applying the compensation principle to your circumstances: the crisis recovery payment is compensation for injury, not loss of income.: 16. Since compensation payments take on the character of what they replace, we need to characterise what the payment was for. We list some factors which we think are relevant. • The payment was made under an income protection policy which paid benefits when you were unable to work. • However, the specific benefit payment was made under an optional extra component, which was triggered when certain medical events happened. Eligibility for the crisis recovery payment didn't depend on loss of income or inability to work. • The payment was a once-off lump sum. • However, the payment was calculated with reference to monthly income protection benefits. The policy suggested the payment "in effect" was a payment of the first six monthly income protection benefits that might have otherwise been payable. 17. On balance, we think the payment is best characterised as a compensation payment for injury, rather than for loss of income. • While the payment was part of a broader insurance package described as an 'income protection plan', the specific benefit was made under a crisis recovery optional extra, which was triggered by injury rather than inability to work. We think the crisis recovery component can be characterised as a separate policy. • While the payment was calculated with reference to monthly income protection benefits, the way the payment was calculated isn't decisive in characterising the payment. • We don't think the insurer's statement that the crisis recovery benefit payment is "in effect" a payment of the first six monthly income protection benefits that might have otherwise been payable is decisive. That can be understood as a convenient shorthand for explaining the structure of the payout to customers. It doesn't necessarily demonstrate that the purpose of the optional extra component is income protection. Also, we need to characterise what the payment was for from your perspective. How the insurer viewed or characterised the payment wouldn't be decisive. • On these facts, we don't think the crisis recovery benefit represents compensation for income. The payment was triggered by injury, not disablement, and the amount of the payment had nothing to do with disablement, reduced ability to work, or reduced income. 18. If the payment is characterised as compensation for injury, not loss of income, it isn't assessable income. The payment takes on the character of what it's compensation for. Payments to compensate for injury are capital, not ordinary income. | Detailed Reasoning - Conclusion: the crisis recovery benefit isn't ordinary income: 19. It follows that the crisis recovery benefit isn't your ordinary income under section 6-5. | Detailed Reasoning - Statutory income: relevant provisions include amounts in respect of employment and capital gains: 20. Assessable income also includes statutory income included by specific provisions. We've identified two possibly relevant statutory income provisions here: sections 15-2 and section 102-5. Section 15-2 is about amounts received in respect of employment. We'll address it next. Section 102-5 is about capital gains, which we address in Question 4. | Detailed Reasoning - Section 15-2 doesn't apply: the crisis recovery payment isn't 'in respect of' or 'in relation to' employment or services: 21. Section 15-2 includes the value of certain items relating to employment or services in assessable income. The listed items: allowances, gratuities, compensation, benefits, bonuses, and premiums. They must be "provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you". 22. The phrases 'in respect of' and 'for or in relation directly or indirectly to' aren't defined. Their ordinary meaning suggests some sort of connection. The Macquarie Dictionary suggests the phrases are interchangeable: 'in respect of' means 'in relation or reference to', [5] while 'relation' means connection, and in some contexts is interchangeable with 'reference,' 'regard', or 'respect'. [6] 23. The ATO has guidance about the phrase 'in relation to' in a different context. TR 2011/6 [7] , about the deductibility of capital expenditure under section 40-880, suggests that the phrase 'in relation to' requires a sufficient and relevant connection. See paragraphs 15 and 69 through 92 of TR 2011/6. 24. Here, you received a crisis recovery benefit payment. We've characterised that payment as compensation for injury, rather than compensation for lost income. You received the payment because you suffered a qualifying injury or illness, not because you lost capacity or income. The only connection to 'employment' or 'services rendered by you' is that you took out the policy as an optional extra feature on top of an income protection policy. 25. The crisis recovery benefit payment wasn't received 'in respect' of or 'in relation to' employment or services. While the broader insurance policy might 'relate' to your employment or services rendered, we've chosen to characterise the crisis recovery benefit component as a separate policy. The payment was triggered by, and paid to compensate for, injury. You would have received the payment even if you continued to earn income from employment or services. In the circumstances here, we don't think the connection between the employment and services to the crisis benefit payment is close enough to meet the requirements of section 15-2. | Detailed Reasoning - The crisis recovery benefit isn't statutory income: neither section 15-2 or 102-5 applies.: 26. Section 102-5 includes net capital gains in assessable income. The crisis recovery benefit isn't assessable under section 102-5. It doesn't create a net capital gain for the reasons discussed in Question 4. 27. Since neither of the possibly relevant statutory income provisions apply, it follows that the crisis recovery benefit isn't statutory income. | Detailed Reasoning - Conclusion: the crisis recovery benefit isn't included in your assessable income.: 28. The crisis recovery benefit isn't included in your assessable income. It's neither ordinary income under section 6-5 nor statutory income under section 6-10. | Detailed Reasoning - Comment: premiums for the crisis recovery benefit may not be deductible: 29. While this ruling doesn't address the deductibility of premiums under your insurance policy, we wish to draw the issue to your attention. • Very broadly, you can deduct losses or outgoings (under section 8-1) to the extent they are: - incurred in gaining or producing your assessable income, and - aren't private, domestic, or capital in nature. • We've concluded here that the crisis recovery benefit wasn't assessable income to you. • Premiums you pay under the policy are unlikely to be deductible to the extent they relate to the crisis recovery component. • It's possible that you may be able to deduct premiums to the extent they relate to the ordinary income protection component of your policy. • If you claim any deductions, you'll need to have a reasonable basis for your apportionment. • See Product Ruling PR 2022/3 AIA Australia Limited - Priority Protection - income protection insurance cover for some discussion about these issues. Note that PR 2022/3 only covers taxpayers who took out a specific policy with AIA Australia Limited between 1 July 2021 and 30 June 2024. Nevertheless, you may find the reasoning helpful in self-assessing your tax position. | Detailed Reasoning - Question 2: Should the 'No Claims Bonus' payment be included in your assessable income? | Summary: 30. No. The component of the crisis recovery benefit which is attributable to the 'no-claims bonus' isn't included in your assessable income as ordinary income under section 6-5. | Detailed Reasoning - The 'no-claims bonus' doesn't make any difference to how we characterise the payment: it's still compensation for injury, not lost income.: 31. As mentioned at paragraph 12, how a payment is calculated isn't decisive when characterising a receipt. 32. Here, the no-claims bonus increases your monthly benefit by certain amounts if you haven't claimed against the policy. The product disclosure document says customers are potentially eligible for the no-claims bonus if they don't make a claim for at least X years after purchasing optional benefits. The no-claims bonus had the effect of increasing your crisis recovery benefit, because you received a lump sum payment equal to six of your monthly benefits. 33. As discussed at paragraph 17, we chose to characterise your crisis recovery payment as compensation for an injury or medical condition, not income protection. 34. On these facts, we don't think those factors change the character of the receipt. Your entitlement to the no-claims bonus depended on you purchasing the optional benefits plan, and not claiming against the policy for a certain period. The no-claims bonus has no relevance other than adjusting the payment amount: it doesn't make any part of the payment compensation for lost income. The bonus doesn't turn the crisis recovery benefit into a receipt that has the character of ordinary income. | Detailed Reasoning - Question 3: If the 'crisis recovery benefit' payment is to be included in your assessable income, which financial year does it apply to as the period for which you are being paid spans two income years? 35. Not applicable because the answer to Questions 1 and 2 is 'no'. | Detailed Reasoning - Question 4: Will any capital gains arising from the 'crisis recovery benefit' be disregarded? | Detailed Reasoning - Relevant law: capital gains from compensation for injury or illness are disregarded: 36. As mentioned at paragraph 8, assessable income includes statutory income: section 6-10. Statutory income is included in assessable income by a specific provision. 37. One example of statutory income is capital gains: section 102-5 includes net capital gains in assessable income. 38. Very broadly, under capital gains provisions, you may make a capital gain when CGT events happen to CGT assets. [8] 39. CGT event C2 happens if your ownership of an intangible CGT asset ends in any of six listed circumstances: subsection 104-25(1). The list includes: • being redeemed or cancelled • being released, discharged, or satisfied. 40. An 'intangible asset' probably means a non-physical asset in this context. 'Intangible CGT asset' isn't defined, so we need to look to ordinary usage and context for guidance. One meaning of 'intangible' is an immaterial thing which can't be touched. [9] The Macquarie Dictionary says when referring to assets, 'intangible' means 'existing only in connection with something else, as the goodwill of a business'. [10] We see nothing in the legislative context to suggest the phrase means anything other than the ordinary meaning here. 41. CGT assets mean any kind of property, or a legal or equitable right that isn't property: subsection 108-5(1). 42. Section 118-137 disregards capital gains and losses from CGT events which relate directly to circumstances listed in that section. Relevantly, paragraph 118-37(1)(a) covers compensation or damages you receive for: • any wrong or injury you suffer in your occupation • any wrong, injury, or illness you or your relative suffers personally. | Detailed Reasoning - Applying these principles: CGT event C2 happens, but section 118-137 disregards any capital gain: 43. CGT event C2 happened when you received the lump sum payment. Once you suffered a qualifying medical condition, you had a right under the policy to claim for a crisis recovery benefit. That right is a CGT asset because it's either property, or alternatively, a legal right that isn't property. [11] A right to claim insurance is an intangible asset: it isn't a physical thing, and it exists only under a contract with the insurer. That right was released, discharged, or satisfied when the insurer accepted the claim and paid out the benefit. 44. Section 118-137 will apply to exclude any capital gain happening when you received the crisis recovery benefit. Insurance payouts are compensation for certain events happening. The relevant event was a medical condition, which is an injury or illness which you 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. | Detailed Reasoning - Conclusion: the crisis recovery benefit won't be included in your assessable income.: 45. It follows that any capital gain from you receiving the crisis recovery benefit won't be included in your assessable income. [1] Taxation Ruling TR 2006/3 Income tax: government payments to assist entities (including individuals) to continue, commence or cease business. [2] Taxation Determination TD 2016/18 Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (SA) assessable income of the worker? [3] Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? [4] Taxation Determination TD 95/41 Income tax: is a premium payable on a trauma insurance policy by a self-employed person or an employee an allowable deduction to the self-employed person or employee? [5] Macquarie Dictionary Publishers 2022, Macquarie Dictionary online, 'respect' (11th meaning listed), accessed https://www.macquariedictionary.com.au/features/word/search/?search_word_type=Dictionary&word=in+respect+of on 4 August 2022. [6] Macquarie Dictionary Publishers 2022, Macquarie Dictionary online, 'respect' (multiple meanings), accessed https://www.macquariedictionary.com.au/features/word/search/?search_word_type=Dictionary&word=relation on 4 August 2022. [7] Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues. [8] For completeness, some CGT events aren't connected with CGT assets. [9] Macquarie Dictionary Publishers 2022, Macquarie Dictionary online, 'intangible' (1 st meaning listed), accessed https://www.macquariedictionary.com.au/features/word/search/?search_word_type=Dictionary&word=intangible on 4 August 2022; Oxford University Press 2004, Australian Oxford Dictionary, 2 nd edn, 'intangible' (1 st meaning listed), accessed https://www.oxfordreference.com/view/10.1093/acref/9780195517965.001.0001/m-en_au-msdict-00001-0027551?rskey=SBzPA0&result=1 on 4 August 2022. [10] Macquarie Dictionary Publishers 2022, Macquarie Dictionary online, 'intangible' (3 rd meaning listed), accessed https://www.macquariedictionary.com.au/features/word/search/?search_word_type=Dictionary&word=intangible on 4 August 2022. [11] Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts suggests that the right to seek compensation is a proprietary right: see paragraphs 32 to 61.

expiry date for the benefit. | Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997.