Private ruling: Assessability of insurance payment
Published: March 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Question and answer | Is the death benefit insurance payment assessable income? | No.

Relevant facts and circumstances: The deceased passed away in the year ended 30 June 2013. Prior to the deceased's death, the deceased had taken out an income protection insurance policy. The estate of the deceased was paid a death benefit under the insurance policy in the year ended 30 June 2013.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 6-10.

Reasons for decision: Summary: Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year. | Detailed Reasoning - Ordinary income: 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 received a death benefit under the insurance policy. This payment was not income from rendering personal services, income from property or income from carrying on a business. It was also not earned, expected or relied upon and was a one-off payment and thus does not have an element of recurrence or regularity. The lump sum payment is therefore not ordinary income. | Detailed Reasoning - Statutory income - capital gains tax (CGT): When a life insurance policy is paid out as a lump sum, this involves a surrender or termination of the holder's rights under the policy. As a consequence, although not taxed as ordinary income, the payout of a life policy could give rise to a capital gain under CGT Event C2 (section 104-25 of the ITAA 1997) or another provision of ITAA 1997. However, a specific exemption applies to disregard any capital gain (or capital loss) arising on the payment of life insurance proceeds as a lump sum (section 118-300 of the ITAA 1997). In your case, you have received a payout of a life policy in the form of the death benefit. Therefore, section 118-300 of the ITAA 1997 applies and as such any capital gain or capital loss made is disregarded. | Detailed Reasoning - Conclusion: As the payment is not ordinary or statutory income, it is not assessable income. Therefore the payment is not required to be included in your income tax return.