Published: September 2011
Ruling period: 01 July 2010 - 30 June 2011
Date scheme commenced: 30 June 2007

Ruling: Q1: Are the insurance proceeds for your terminated holdings in the managed investment scheme considered income? | A1: Yes | Q2: Are the insurance proceeds for your terminated holdings in the managed investment scheme considered capital, if they are not considered income? | A2: Not applicable

Relevant facts and circumstances: You invested in the managed investment scheme covered under a product ruling. Some of your holdings were materially damaged by a natural disaster. The damaged holdings will be terminated pursuant to the land agreement for the project. You received insurance proceeds in the 2010-11 income tax year representing your net entitlement under the project insurance policy and project constitution.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 17-5

Reasons for decision: Summary: This explanation sets out why the insurance proceeds are considered income under Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Insurance premiums are payable to the projects managing entity for the managed investment scheme or 'the project', to insure the grower's tree crop, against losses or damage caused by fire or other insurable risks. An amount received by a grower as insurance proceeds is a distribution of ordinary income that arises as a result of a grower holding a 'forestry interest' in the project. Growers include their share of any insurance proceeds in their assessable income in the income year in which the amounts are derived (section 6-5 of the ITAA 1997) less any GST payable (section 17-5 of the ITAA 1997). The view that insurance proceeds constitute ordinary income has been established in Taxation Ruling No. IT 155 (IT 155). IT 155 states that it is important to determine the purpose for which the insurance was taken out in order to determine that it is ordinary income. IT 155 refers to the High Court case Carapark Holdings Ltd v FC of T (1966) 115 CLR 653 to assist in determining the purpose of the insurance. The court (Kitto, Taylor and Owen JJ) said that insurance monies are to be considered ordinary income, where the purpose of the insurance is to replace income, if the event that was insured against has occurred. Your holdings in the project were insured against damage caused by an insurable risk; in this case, material damage caused by a natural disaster. The insurance proceeds that you received from your holdings being terminated, due to the material damage, was to replace the ordinary income that you would have received from your holdings, if they had been harvested. The insurance proceeds are therefore considered ordinary income under section 6-5 of the ITAA 1997. | Summary: The insurance proceeds are income, therefore are not considered a capital gain. | Detailed Reasoning - Detailed reasoning: Not necessary.

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. | Subject: Whether insurance proceeds from a managed investment scheme are considered income or capital