Private ruling: Income - Assessability - Terminal illness insurance
Published: June 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is your lump sum terminal illness insurance payment assessable income? | A1: No

Relevant facts and circumstances: You were diagnosed with a terminal illness. You received a lump sum payment for a terminal illness insurance claim. This insurance was paid under a life insurance policy.

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)(b)

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 income derived directly or indirectly from all sources during the income year. The assessable income of a foreign resident includes ordinary income derived directly or indirectly from all Australian sources during the income year. 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 the payment you received was an insurance payment for an illness under a life insurance policy. In accordance with paragraph 2 of Taxation Determination TD 95/41: The purpose of trauma insurance is to provide a capital amount to the insured if the insured suffers a specified medical condition. The policy does not replace earnings lost by the taxpayer. Your terminal illness insurance payment, like trauma insurance, 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. | 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)(b) 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 personal wrong, injury or illness. In your case, the payment was made to you under a terminal illness insurance policy, and as such the payment will be exempt from capital gains tax under paragraph 118-37(1)(b) of the ITAA 1997.