Private ruling: TPD settlement payment
Date of advice: 21 September 2016
Published: November 2016
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the lump sum settlement payment you received from a total and permanent disablement (TPD) claim, assessable income? | A1: No.

Relevant facts and circumstances: Entity A issued life insurance cover to you. In 20XX you were involved in an accident and suffered serious injuries. In 20XX you lodged a claim in relation to your TPD benefit and entity A subsequently commenced assessment of the claim. Later a complaint (the dispute) was made to entity A. Entity A then assessed the claim and subsequently determined that you met the requirements to be considered TPD. On a without prejudice basis and without admissions, entity A offered to pay the settlement sum set as out in the deed of settlement in full and final settlement of the claim under the policies, and in full and final resolution of the dispute. You accepted the offer, and entity A paid you the agreed lump sum amount in the 2016-17 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 15-30 | Income Tax Assessment Act 1997 Section 118-37

Reasons for decision: Summary: Ordinary income Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or 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; and have an element of periodicity, recurrence or regularity. Ordinarily, the receipt of insurance proceeds in the form of a lump sum would not come within the term of ordinary income where the payment has been made in the event of death, or for deprivation or impairment of earning capacity. The exception, however, is where the insurance proceeds have been received to replace lost earnings. In your case, the lump sum payment you received in relation to your TPD claim is of a capital nature since it was received for the loss of your future income earning capacity and not the replacement of lost income. The payment is a one-off payment and thus does not have the element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the investment in insurance, rather than from a relationship with personal services performed. As such, the lump sum payment is not considered to be ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997. Statutory 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 and are also included in assessable income. Statutory provisions about certain types of insurance receipts and capital gains may apply to the payment you received. Section 15-30 of the ITAA 1997 is one such provision which operates to include in your assessable income an amount received by way of insurance or indemnity for the loss of an amount if the lost amount would have been included in your assessable income and the amount received is not assessable as ordinary income under section 6-5 of the ITAA 1997. A person's 'earning capacity' is a capital asset. Therefore, any payment received to compensate for the loss of that capital asset is a capital receipt and is not assessable under section 15-30 of the ITAA 1997. Amounts received to compensate for the loss of capital assets are potentially taxable under the capital gains tax provision of the ITAA 1997. However section 118-37 of the ITAA 1997 disregards a capital gain or capital loss relating to compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally. As the compensation was paid to you for a personal injury suffered, any gain from the benefit received is disregarded. Accordingly, the lump sum payment is not assessable as either ordinary or statutory income and you are not required to include this amount in your income tax return.