Private ruling: Taxation of an Inheritance from a personal insurance policy
Date of advice: 29 November 2016
Published: April 2017
Ruling period: Period ended 30 Jun 20ZZ.
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is my inheritance assessable income and required to be declared on an income tax return? | A1: No.

Relevant facts and circumstances: An insurance policy was taken out in 19XX by an individual. The individual is now deceased. You were a beneficiary of the Estate. You received an inheritance from the Estate.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 6-5 | Income Tax Assessment Act 1997 - Section 118-300(1).

Reasons for decision: Summary: 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, whether in or out of Australia, during the income year. Ordinary income means income 'according to ordinary concepts'. 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. Under section 6-10 of the ITAA 1997 assessable income also includes statutory income. Statutory income is amounts that are not ordinary assessable income. Insurance proceeds paid in satisfaction of rights under an insurance policy are capital proceeds for a CGT event. Subsection 118-300(1) of the ITAA 1997 provides that any capital gain or capital loss you make from a CGT event happening in relation to a CGT asset that is your interest in rights under a general insurance policy, a life insurance policy or an annuity instrument is disregarded in the situations set out in the table. Item 4 of the table in subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy is disregarded where that CGT event happens to an entity that acquired the interest in the policy or instrument for no consideration In your case you have received an inheritance from an Estate upon payment of a life insurance policy, paid out on the passing of the original owner. Any capital gain or capital loss under section 104-25 of the ITAA 1997 made by the estate upon payment of a death benefit under the terms of the respective insurance policies will be disregarded pursuant to item 4 as the estate acquires the right to that payment for no consideration. In your case the inheritance received is not assessable under subsection 6-5(2) of the ITAA 1997 as ordinary income and it is also disregarded by the operation of subsection 118-300(1) of the ITAA 1997. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income and will not therefore be subject to income tax. You are therefore not required to declare the income in your income tax return. However if interest is received on the deposit of this inheritance you need to declare the interest in your income tax return and only the interest will be deemed to be assessable income for tax purposes.