Product Ruling PR 2013/1
Date of effect: 1 July 2012


Class of entities or scheme: 4. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, those entities that can rely on the Ruling section are referred to as the Policy Owner. 5. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities who are individuals (not acting in a trustee capacity) issued with the Policy (the Policy Owner) on or after 1 July 2012 and on or before 30 June 2015. 6. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities who are issued with the Policy before 1 July 2012 or after 30 June 2015. | Superannuation Industry (Supervision) Act 1993: 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 17 to 21 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 11. This Product Ruling applies prospectively from 1 July 2012. It therefore applies only to the specified class of entities that enter into the scheme from 1 July 2012 until 30 June 2015, being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application. 12. However the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme. | Changes in the law: 13. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect. 14. Entities who are considering participating in the scheme are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued. | Note to promoters and advisers: 15. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued. 16. Subject to paragraph 3 and the assumptions in paragraph 21 of this Ruling: 17. The scheme that is the subject of this Ruling is identified and described in the following documents: 18. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which the Policy Owner, or any associate of the Policy Owner, will be a party to, which are a part of the scheme. Capitalised terms have the meaning provided in the Product Disclosure Statement and/or the Policy Document. 19. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 20. Following is a summary of the scheme: | Assumptions: 21. This Ruling is made on the basis of the following assumptions: Commissioner of Taxation 6 February 2013 | Monthly Benefits assessable as ordinary income under section 6-5: 22. Section 6-5 includes income according to ordinary concepts (ordinary income) in assessable income. Income according to ordinary concepts refers to an accepted usage of the word 'income' and income that Courts have determined is ordinary income. 23. The characterisation to be accorded to the Monthly Benefits payable to the Policy Owner will depend on the purpose of the payments and the circumstances of their receipt: Tinkler v. Federal Commissioner of Taxation (1979) 29 ALR 663; (1979) 10 ATR 411; 79 ATC 4641 per Brennan J at ALR 667; ATR 414; ATC 4644. Under the Income Protection Platinum cover, the Policy Owner takes out the Policy with the intention to receive the Monthly Benefits on the happening of a specified event, being their Total or Partial Disability which prevents them from performing the duties of their occupation necessary to produce some or all of their Earnings. The Monthly Benefits payable under the Income Protection Platinum cover are intended to compensate the Policy Owner for the loss of earnings. 24. Ordinarily, the receipt of insurance proceeds to replace lost earnings would be ordinary income: Federal Commissioner of Taxation v. DP Smith (1981) 147 CLR 578; 11 ATR 538; 81 ATC 4114 ( DP Smith ). This is to be distinguished from circumstances under which the receipt of insurance proceeds is intended to compensate for the loss of earning capacity. 25. Accordingly, the payments of the Monthly Benefits under the Income Protection Platinum cover are ordinary income (and not capital receipts), assessable under section 6-5. | Lump sum benefit not assessable as ordinary income under section 6-5: 26. As is the case in respect of the Monthly Benefits, the characterisation to be accorded to the lump sum benefit payable to a Policy Owner under the Lump Sum Benefit Option will depend on the purpose of the payment and the circumstances of its receipt. Under the Income Protection Platinum cover, the Policy Owner selects the Lump Sum Benefit Option with the intention of receiving the lump sum benefit on the happening of a specified event, being their Total and Permanent Disability which is likely to prevent them from performing the duties of their occupation ever again. The lump sum benefit payable under the Lump Sum Benefit Option is intended not to compensate the Policy Owner for the loss of earnings but for the loss of their earning capacity. 27. 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: Federal Commissioner of Taxation v. Slaven (1984) 1 FCR 11; 15 ATR 242; 84 ATC 4077. Such payments are capital in nature. 28. Accordingly, the lump sum benefit under the Lump Sum Benefit Option is a capital receipt, and is not assessable under section 6-5 as ordinary income. | Capital gain or loss from payment under the Lump Sum Benefit Option disregarded: 29. Under subsection 108-5(1) a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of a Policy Owner under the Lump Sum Benefit Option are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1). 30. Where MLC makes a payment of the lump sum benefit in satisfaction of the Policy Owner's contractual rights under the Lump Sum Benefit Option, their ownership of those rights are discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b)). 31. The Policy Owner makes a capital gain from this CGT event if their capital proceeds from the ending of the ownership of their asset are more than the asset's cost base or, alternatively, a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). 32. Section 118-37 disregards a capital gain or capital loss relating to compensation or damages received by a taxpayer as a result of any wrong, injury or illness they or their relative suffered. 33. A receipt of an amount under an insurance policy for a non-death benefit such as total and permanent disablement constitutes a form of compensation or damages covered by paragraph 118-37(1)(b) where the amount is received for a wrong, injury or illness suffered personally by the recipient or the recipient's relative. 34. Any capital gain or capital loss the Policy Owner makes under section 104-25 upon payment of the lump sum benefit by MLC under the Lump Sum Benefit Option in respect of the Total and Permanent Disability suffered by the Policy Owner will be disregarded under paragraph 118-37(1)(b). | Deductibility of premiums: 35. Generally, the question of whether a premium is deductible is answered by reference to whether the benefits, when paid, would be assessable. In discussing the operation of subsection 51(1) of the ITAA 1936 (being the equivalent of section 8-1 of the ITAA 1997) in the High Court decision of DP Smith , Gibbs, Stephen, Mason, and Wilson JJ held at CLR 585; ATR 542; ATC 4117 that: 36. Murphy J delivered a separate judgment but concurred with the view of the majority of their Honours and stated at CLR 587; ATR 543; ATC 4118: 37. As the Monthly Benefits are intended to compensate for the loss of earnings of the Policy Owner and would be assessable to the Policy Owner (see paragraphs 22 to 25 of this Product Ruling), the premiums incurred by a Policy Owner under the Income Protection Platinum cover, excluding the portion of the premiums that relate to the Lump Sum Benefit Option, are incurred in gaining or producing assessable income and therefore deductible under section 8-1. 38. As the lump sum benefit is not intended to compensate for the loss of earnings of the Policy Owner but is intended to compensate for the loss of earning capacity of the Policy Owner it is treated as capital (see paragraphs 26 to 28 of this Product Ruling). The premiums are not incurred in gaining or producing assessable income to the extent that they relate to the Lump Sum Benefit Option, and therefore are not deductible under section 8-1. Premiums that are not deductible under section 8-1 are included in the first element of the cost base or reduced cost base of the CGT asset referred to in paragraph 29 of this Product Ruling (subsections 110-25(2) and 110-55(2)). 39. Section 8-1 does not prescribe any method of apportioning expenditure. The portion of the premiums incurred by a Policy Owner under the Income Protection Platinum cover which is not deductible under section 8-1, as per paragraph 38 of this Product Ruling, should be determined pursuant to a method of apportionment that is both fair and reasonable in the circumstances. Pursuant to the assumption at paragraph 21(d) of this Product Ruling, the portion of the premiums which relate to the Lump Sum Benefit Option, and is therefore not deductible under section 8-1, is 10 per cent. | Part IVA - anti-avoidance: 40. Provided that the scheme ruled on is entered into and carried out as disclosed in this Ruling, it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply. 41. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: This Product Ruling has been given on the basis that the entity (s) who applied for the Product Ruling, and their associates, will abide by its strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Ruling. 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section apply to the defined class of entities who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. 2. In this Product Ruling the scheme involves the payment of insurance benefits to Policy Owners under MLC Insurance (the Policy) issued by MLC Limited (MLC) in respect of the Income Protection Platinum cover. 3. This Product Ruling does not: | Class of entities: 4. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, those entities that can rely on the Ruling section are referred to as the Policy Owner. 5. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities who are individuals (not acting in a trustee capacity) issued with the Policy (the Policy Owner) on or after 1 July 2012 and on or before 30 June 2015. 6. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities who are issued with the Policy before 1 July 2012 or after 30 June 2015. | Superannuation Industry (Supervision) Act 1993: 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 17 to 21 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:


Appendix: Monthly Benefits assessable as ordinary income under section 6-5: 22. Section 6-5 includes income according to ordinary concepts (ordinary income) in assessable income. Income according to ordinary concepts refers to an accepted usage of the word 'income' and income that Courts have determined is ordinary income. 23. The characterisation to be accorded to the Monthly Benefits payable to the Policy Owner will depend on the purpose of the payments and the circumstances of their receipt: Tinkler v. Federal Commissioner of Taxation (1979) 29 ALR 663; (1979) 10 ATR 411; 79 ATC 4641 per Brennan J at ALR 667; ATR 414; ATC 4644. Under the Income Protection Platinum cover, the Policy Owner takes out the Policy with the intention to receive the Monthly Benefits on the happening of a specified event, being their Total or Partial Disability which prevents them from performing the duties of their occupation necessary to produce some or all of their Earnings. The Monthly Benefits payable under the Income Protection Platinum cover are intended to compensate the Policy Owner for the loss of earnings. 24. Ordinarily, the receipt of insurance proceeds to replace lost earnings would be ordinary income: Federal Commissioner of Taxation v. DP Smith (1981) 147 CLR 578; 11 ATR 538; 81 ATC 4114 ( DP Smith ). This is to be distinguished from circumstances under which the receipt of insurance proceeds is intended to compensate for the loss of earning capacity. 25. Accordingly, the payments of the Monthly Benefits under the Income Protection Platinum cover are ordinary income (and not capital receipts), assessable under section 6-5. | Lump sum benefit not assessable as ordinary income under section 6-5: 26. As is the case in respect of the Monthly Benefits, the characterisation to be accorded to the lump sum benefit payable to a Policy Owner under the Lump Sum Benefit Option will depend on the purpose of the payment and the circumstances of its receipt. Under the Income Protection Platinum cover, the Policy Owner selects the Lump Sum Benefit Option with the intention of receiving the lump sum benefit on the happening of a specified event, being their Total and Permanent Disability which is likely to prevent them from performing the duties of their occupation ever again. The lump sum benefit payable under the Lump Sum Benefit Option is intended not to compensate the Policy Owner for the loss of earnings but for the loss of their earning capacity. 27. 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: Federal Commissioner of Taxation v. Slaven (1984) 1 FCR 11; 15 ATR 242; 84 ATC 4077. Such payments are capital in nature. 28. Accordingly, the lump sum benefit under the Lump Sum Benefit Option is a capital receipt, and is not assessable under section 6-5 as ordinary income. | Capital gain or loss from payment under the Lump Sum Benefit Option disregarded: 29. Under subsection 108-5(1) a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of a Policy Owner under the Lump Sum Benefit Option are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1). 30. Where MLC makes a payment of the lump sum benefit in satisfaction of the Policy Owner's contractual rights under the Lump Sum Benefit Option, their ownership of those rights are discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b)). 31. The Policy Owner makes a capital gain from this CGT event if their capital proceeds from the ending of the ownership of their asset are more than the asset's cost base or, alternatively, a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). 32. Section 118-37 disregards a capital gain or capital loss relating to compensation or damages received by a taxpayer as a result of any wrong, injury or illness they or their relative suffered. 33. A receipt of an amount under an insurance policy for a non-death benefit such as total and permanent disablement constitutes a form of compensation or damages covered by paragraph 118-37(1)(b) where the amount is received for a wrong, injury or illness suffered personally by the recipient or the recipient's relative. 34. Any capital gain or capital loss the Policy Owner makes under section 104-25 upon payment of the lump sum benefit by MLC under the Lump Sum Benefit Option in respect of the Total and Permanent Disability suffered by the Policy Owner will be disregarded under paragraph 118-37(1)(b). | Deductibility of premiums: 35. Generally, the question of whether a premium is deductible is answered by reference to whether the benefits, when paid, would be assessable. In discussing the operation of subsection 51(1) of the ITAA 1936 (being the equivalent of section 8-1 of the ITAA 1997) in the High Court decision of DP Smith , Gibbs, Stephen, Mason, and Wilson JJ held at CLR 585; ATR 542; ATC 4117 that: 36. Murphy J delivered a separate judgment but concurred with the view of the majority of their Honours and stated at CLR 587; ATR 543; ATC 4118: 37. As the Monthly Benefits are intended to compensate for the loss of earnings of the Policy Owner and would be assessable to the Policy Owner (see paragraphs 22 to 25 of this Product Ruling), the premiums incurred by a Policy Owner under the Income Protection Platinum cover, excluding the portion of the premiums that relate to the Lump Sum Benefit Option, are incurred in gaining or producing assessable income and therefore deductible under section 8-1. 38. As the lump sum benefit is not intended to compensate for the loss of earnings of the Policy Owner but is intended to compensate for the loss of earning capacity of the Policy Owner it is treated as capital (see paragraphs 26 to 28 of this Product Ruling). The premiums are not incurred in gaining or producing assessable income to the extent that they relate to the Lump Sum Benefit Option, and therefore are not deductible under section 8-1. Premiums that are not deductible under section 8-1 are included in the first element of the cost base or reduced cost base of the CGT asset referred to in paragraph 29 of this Product Ruling (subsections 110-25(2) and 110-55(2)). 39. Section 8-1 does not prescribe any method of apportioning expenditure. The portion of the premiums incurred by a Policy Owner under the Income Protection Platinum cover which is not deductible under section 8-1, as per paragraph 38 of this Product Ruling, should be determined pursuant to a method of apportionment that is both fair and reasonable in the circumstances. Pursuant to the assumption at paragraph 21(d) of this Product Ruling, the portion of the premiums which relate to the Lump Sum Benefit Option, and is therefore not deductible under section 8-1, is 10 per cent. | Part IVA - anti-avoidance: 40. Provided that the scheme ruled on is entered into and carried out as disclosed in this Ruling, it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. | This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling. | What is incidental and relevant in the sense mentioned falls to be determined not by reference to the certainty or likelihood of the outgoing resulting in the generation of income but to its nature and character, and generally to its connection with the operations which more directly gain or produce the assessable income. It is true that the payment of the premium in June 1978 did not result in the generation of any income in that year, but there is a sufficient connection between the purchase of the cover against the loss of ability to earn and the consequent earning of assessable income to bring the premium within the first limb of s 51(1). | In general, if receipts under such a policy would be treated as income, the premiums should be treated as allowable expenditure, and if the receipts would be treated as capital the premiums should not be allowable expenditure. | Appendix 2 - Detailed contents list


Legislative references: ITAA 1936 51(1) ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 6-5 ITAA 1997 8-1 ITAA 1997 104-25 ITAA 1997 104-25(1)(b) ITAA 1997 104-25(3) ITAA 1997 108-5(1) ITAA 1997 118-37 ITAA 1997 118-37(1)(b) SISA 1993 TAA 1953 Copyright Act 1968
Case references: FC of T v. DP Smith (1981) 147 CLR 578 (1981) 11 ATR 538 81 ATC 4114
Subject references: financial products insurance policy product rulings public rulings taxation administration