Private ruling: Income - assessable income
Date of advice: 17 March 2016
Published: May 2016
Ruling period: 1 July 2015 to 30 June 2016

Ruling: Questions and answers | 1. Is the lump sum payment you received from your insurance assessable income under section 6-5 of the Income Tax Assessment Act 1997 ? | No. | 2. Is the lump sum payment you received from your insurance exempt from capital gains tax under paragraph 118-37(1)(a)(ii) of the Income Tax Assessment Act 1997 ? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You have been diagnosed with an illness. You received a lump sum payout from your insurance. The lump sum payment was directly credited to your mortgage account. The insurance disclosure statement states the insurance is optional and not a condition of a loan. The insurance is in addition to your Death Benefit and is paid out once for each insured person. Your Death Benefit is reduced by the amount of the insurance paid. The insurance is payable during the period of insurance if you suffer one of the listed medical trauma conditions or events in the disclosure statement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 paragraph 118-37(1)(a)(ii)

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary and statutory income derived directly and indirectly from all sources during the income year. 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 • have an element of periodicity, recurrence or regularity. | Detailed Reasoning - Capital gains tax: Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income. Receipt of a lump sum payment may give rise to a capital gain (statutory income). However paragraph 118-37(1)(a)(ii) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any wrong, injury or illness your suffer personally. | Detailed Reasoning - Application to your circumstances: The payment you received was an insurance payment for an illness under an insurance policy. The insurance payment does not have the characteristics of ordinary income and was not earned by you and did not relate to services performed. The payment is also a one-off payment and does not have an element of recurrence or regularity. Although the payment can be said to be expected and perhaps relied upon, this expectation arises from suffering resulting from a medical condition. Therefore, the lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the ITAA 1997. Accordingly, the amount is not required to be included in your income tax return. However, consideration must be given to whether the payment gives rise to a capital gain (Statutory income). The payment was made to you under an insurance policy which is payable if you suffer one of the listed medical trauma conditions or events in the disclosure statement. Accordingly, as you received the payment for suffering a personal illness the payment will be exempt from capital gains tax under paragraph 118-37(1)(a)(ii) of the ITAA 1997.