Private ruling: Whether a lump sum payment is assessable income
Date of advice: 4 August 2017
Published: November 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is payment you received assessable income under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: You suffered an illness. You received a lump sum from an insurance policy as a result of your illness.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 6-15(1) | 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 a taxpayer includes income according to ordinary concepts (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. The lump sum payment of the specific illness benefit was not earned by you it does not directly relate to services performed. Rather the lump sum relates to personal circumstances that have arisen during your life. The payment is also a one-off payment and thus 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 the investment in insurance, rather than from a relationship with personal services performed. The lump sum payment is not considered ordinary income and is therefore not assessable under section 6-5 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 specific provisions of the income tax law, are called statutory income. These specific provisions of the income tax law are listed in section 10-5 of the ITAA 1997, and include the capital gains tax (CGT) provisions. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. TR 95/35 provides that an insured's right of indemnity under a policy of insurance falls within the definition of a right to seek compensation. The whole of the settlement amounts are thus treated as capital proceeds from a CGT event happening to the taxpayer's right to seek compensation. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Therefore any capital gain made from the CGT event happening to your right to seek benefits (compensation) under the insurance policies is disregarded under paragraph 118-37(1)(b) of the ITAA 1997. The lump sum payment of the specific injury benefit you received is therefore not statutory income. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the lump sum you received is included in your assessable income.