Private ruling: Income-Insurance
Published: April 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is a lump sum payment you received under the trauma terms of an income protection policy, assessable? | A1: No


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Subsection 6-15(2). | Income Tax Assessment Act 1997 Section 6-20. | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the 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, and · have an element of periodicity, recurrence or regularity. In your case you have not earned the lump sum payment for total and permanent disability as the payment does not relate to services performed. Rather the payment relates to personal circumstances that have arisen. Whilst the payment can be said to be expected, and perhaps relied upon, this expectation arises from an insurance policy, rather than from a relationship with personal services performed. Thus, the lump sum payment is not considered to be ordinary income. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling provides that an insured person's right of indemnity under a policy of insurance falls within the definition of a right to seek compensation. The whole of the settlement amount is thus treated as capital proceeds from a capital gains tax (CGT) event (CGT event C2) happening to the your right to seek compensation. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Therefore any capital gain made from the CGT event happening to your right to seek compensation is disregarded under paragraph 118-37(1)(b). It is thus not statutory income. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount received is included in your assessable income.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You have received a lump sum payment under the trauma terms of an income protection insurance policy. | You were diagnosed with an illness. | You never received any income protection payments to replace your income due to your inability to work. | The lump sum payment is equal to 6 months of a predetermined monthly benefit.