Product Ruling PR 2015/11
Date of effect: 1 July 2015

What this ruling is about: 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 under a Professional Sports Person Personal Accident and Illness Insurance policy for professional sports people (Policy), issued by ATC Insurance Solutions Pty Ltd (ATC). 3. This Product Ruling does not address: 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 life insured and the Beneficiary. 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) and: 6. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities who are not one of the entities listed in paragraph 5 of this Product Ruling. 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 16 to 20 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:

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 life insured and the Beneficiary. 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) and: 6. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities who are not one of the entities listed in paragraph 5 of this Product Ruling. | 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 16 to 20 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 Product Ruling applies from 1 July 2015. It therefore applies only to the specified class of entities that enter into the scheme from 1 July 2015 until 30 June 2018, 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. 11. 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: 12. 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. 13. 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: 14. 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. | Application of this Ruling: 15. Subject to paragraph 3 and the assumptions in paragraph 20 of this Ruling: 16. The scheme that is the subject of this Ruling is identified and described in the following documents: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 17. 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 life insured or Beneficiary, or any associate of the life insured or Beneficiary, will be a party to, which are a part of the scheme. Unless otherwise defined, capitalised terms in this Product Ruling take their meaning as per the Policy Wording in the PDS. 18. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 19. Following is a summary of the scheme: | Assumptions: 20. This Ruling is made on the basis of the following assumptions Commissioner of Taxation 16 December 2015 | Temporary Total Disablement benefit assessable as ordinary income under section 6-5: 21. 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. 22. The characterisation to be accorded to the insurance proceeds payable to the life insured in respect of their Temporary Total Disablement will depend on the purpose of the payments and the circumstances of their receipt: Tinkler v. Federal Commissioner of Taxation (1979) 29 ALR 663; 79 ATC 4641; (1979) 10 ATR 411 per Brennan J at ALR 667; ATC 4644; ATR 414. Under the Temporary Total Disablement cover, a Policy is taken out with the intention to receive the insured amount on the happening of a specified event, being the life insured's Total Disablement which prevents them from Participating in their Occupation for a continuous but finite period. The Temporary Total Disablement benefit payable in the event of the life insured's Temporary Total Disablement is intended to compensate for the loss of the life insured's earnings. 23. 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; [1981] HCA 10; 81 ATC 4114; (1981) 11 ATR 538 ( 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. 24. Accordingly, the payments under the Temporary Total Disablement cover are ordinary income (and not capital receipts), assessable under section 6-5. | Permanent Total Disablement benefit and death benefit not assessable as ordinary income under section 6-5: 25. As is the case in respect of the life insured's Temporary Total Disablement, the characterisation to be accorded to the insurance proceeds payable in respect of the life insured's Permanent Total Disablement and death by Accident will depend on the purpose of the payments and the circumstances of their receipt. Under the Permanent Total Disablement cover, a Policy is taken out with the intention to receive the insured amount on the happening of a specified event, being the life insured's Total Disablement which prevents them from Participating in their Occupation ever again. Under the death by Accident cover, a Policy is taken out with the intention to receive the insured amount on the happening of the death of the life insured from an Accident. The Permanent Total Disablement benefit and death benefit payable in the event of the life insured's Permanent Total Disablement and death by Accident respectively, is intended not to compensate for the loss of earnings of the life insured but for the loss of earning capacity of the life insured. 26. 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; 84 ATC 4077; (1984) 15 ATR 242. Such payments are capital in nature. 27. Whether the receipt of a Permanent Total Disablement benefit in regular or periodic instalments (rather than in a lump sum) alters the character of the receipt requires further consideration. While periodicity or recurrence of payments is indicative that a series of payments is ordinary income, it is not definitive in classifying a series of payments: Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443 ( Dixon ) per Fullagar J at CLR 568; ATD 92; AITR 456. 28. In accordance with the principle enunciated in Dixon , an amount paid in substitution for another amount takes the character of the substituted amount. Therefore, any Permanent Total Disablement benefit paid periodically in substitution for a capital payment retains its capital characterisation. 29. Further, compensation for loss of earning capacity does not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the life insured would have earned had they not sustained a Permanent Total Disablement or died as a result of an Accident. 30. Accordingly, the Permanent Total Disablement benefit and death benefit are capital receipts, and are not assessable under section 6-5 as ordinary income. | Permanent Total Disablement benefit and death benefit not assessable as statutory income under section 15-30: 31. Section 6-10 includes statutory income in assessable income (that is, amounts that are not ordinary income but are included in assessable income by another provision). Section 15-30 is one such provision which operates to include in your assessable income an amount received by way of insurance or indemnity for the loss of an amount if the lost amount would have been included in your assessable income and the amount received is not assessable as ordinary income under section 6-5. 32. Both the Permanent Total Disablement benefit and death benefit are payments received by way of insurance. 33. Whether a payment received by way of insurance or indemnity is subject to tax under paragraph 26(j) of the ITAA 1936 (the predecessor to section 15-30 of the ITAA 1997) was considered in Federal Commission of Taxation v. Inkster (1989) 24 FCR 53; (1989) 89 ALR 137; 89 ATC 5142; (1989) 20 ATR 1516 and Groves v. United Pacific Transport Pty. Ltd. and Thompson [1965] Qd R 62. As the compensation paid under these cases was for the loss of earning capacity, as distinct from the loss of income which would have been assessable income if the loss had not occurred, it was held that any payment thus received was not subject to assessment under paragraph 26(j) of the ITAA 1936. For subsection 26(j) of the ITAA 1936 to have applied, it would have been necessary to demonstrate that an actual loss of income suffered by the insured had been indemnified. 34. The Permanent Total Disablement benefit and death benefit are for the loss of the life insured's earning capacity, and not for the loss of income. Any payment received to compensate for the loss of earning capacity is a capital receipt and does not fall to be assessed under section 15-30. | Capital gain or loss from payments under the Policy disregarded: 35. 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 the life insured and Beneficiary under the Policy are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1). 36. Where ATC makes a payment of the Temporary Total Disablement benefit, Permanent Total Disablement benefit or death benefit in satisfaction of the life insured's or Beneficiary's contractual rights under the Policy, their ownership of those rights are discharged or satisfied in whole or part. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b)). 37. The life insured, or the Beneficiary in the event of the life insured's death by Accident, 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)). | Section 118-37 - Temporary Total Disablement benefit and Permanent Total Disablement benefit: 38. 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. 39. A receipt of an amount under an insurance policy for a non-death benefit such as Temporary Total Disablement or Permanent Total Disablement constitutes a form of compensation or damages covered by subparagraph 118-37(1)(a)(ii) where the amount is received for a wrong, injury or illness suffered personally by the recipient or the recipient's relative. 40. Any capital gain or capital loss the life insured makes under section 104-25 upon payment of a Temporary Total Disablement benefit (to the extent that any such capital gain has not already been reduced pursuant to the operation of section 118-20) or Permanent Total Disablement benefit by ATC under the Policy in respect of the Temporary or Permanent Total Disablement suffered by the life insured will be disregarded under subparagraph 118-37(1)(a)(ii). | Section 118-300 - death benefit: 41. Section 118-300 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual. The meaning to be given to the expression 'policy of insurance on the life of an individual' includes, but is not limited to, life insurance policies within the common law meaning of that term. It can apply to other life insurance policies as defined in subsection 995-1(1) but only to the extent that those policies provide for a sum of money to be paid if an event happens that results in the death of an individual (Taxation Determination TD 2007/4). [1] 42. Item 4 of the table in subsection 118-300(1) provides that a capital gain or capital loss you made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 43. A designated Beneficiary would be taken to have acquired rights under the Policy for no consideration. The Beneficiary will therefore be entitled under item 4 in the table in subsection 118-300(1) to disregard any capital gain or capital loss they make under section 104-25 from the receipt of a payment of a death benefit from ATC. | Premiums relating to Temporary Total Disablement deductible: 44. 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; ATC 4117; ATR 542 that: 45. Murphy J delivered a separate judgment but concurred with the view of the majority of their Honours and stated at CLR 587; ATC 4118; ATR 543: 46. As the Temporary Total Disablement benefit is intended to compensate for the loss of earnings of the life insured and would be assessable to the life insured (see paragraphs 21 to 24 of this Product Ruling), premiums incurred by the life insured that relate to Temporary Total Disablement cover are incurred in gaining or producing assessable income and therefore deductible under section 8-1. | Premiums relating to Permanent Total Disablement and death by Accident not deductible: 47. As the Permanent Total Disablement benefit and death benefit are not intended to compensate for the loss of earnings of the life insured but are intended to compensate for the loss of earning capacity of the life insured they are treated as capital (see paragraphs 25 to 30 of this Product Ruling). Premiums incurred by the life insured are not incurred in gaining or producing assessable income to the extent that they relate to Permanent Total Disablement and death by Accident cover, 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 35 of this Product Ruling (subsections 110-25(2) and 110-55(2)). | Part IVA - anti-avoidance: 48. 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. 49. The following is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Not previously issued as a draft

Ruling: 15. Subject to paragraph 3 and the assumptions in paragraph 20 of this Ruling: 16. The scheme that is the subject of this Ruling is identified and described in the following documents: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 17. 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 life insured or Beneficiary, or any associate of the life insured or Beneficiary, will be a party to, which are a part of the scheme. Unless otherwise defined, capitalised terms in this Product Ruling take their meaning as per the Policy Wording in the PDS. 18. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 19. Following is a summary of the scheme: | Assumptions: 20. This Ruling is made on the basis of the following assumptions Commissioner of Taxation 16 December 2015 | Temporary Total Disablement benefit assessable as ordinary income under section 6-5: 21. 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. 22. The characterisation to be accorded to the insurance proceeds payable to the life insured in respect of their Temporary Total Disablement will depend on the purpose of the payments and the circumstances of their receipt: Tinkler v. Federal Commissioner of Taxation (1979) 29 ALR 663; 79 ATC 4641; (1979) 10 ATR 411 per Brennan J at ALR 667; ATC 4644; ATR 414. Under the Temporary Total Disablement cover, a Policy is taken out with the intention to receive the insured amount on the happening of a specified event, being the life insured's Total Disablement which prevents them from Participating in their Occupation for a continuous but finite period. The Temporary Total Disablement benefit payable in the event of the life insured's Temporary Total Disablement is intended to compensate for the loss of the life insured's earnings. 23. 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; [1981] HCA 10; 81 ATC 4114; (1981) 11 ATR 538 ( 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. 24. Accordingly, the payments under the Temporary Total Disablement cover are ordinary income (and not capital receipts), assessable under section 6-5. | Permanent Total Disablement benefit and death benefit not assessable as ordinary income under section 6-5: 25. As is the case in respect of the life insured's Temporary Total Disablement, the characterisation to be accorded to the insurance proceeds payable in respect of the life insured's Permanent Total Disablement and death by Accident will depend on the purpose of the payments and the circumstances of their receipt. Under the Permanent Total Disablement cover, a Policy is taken out with the intention to receive the insured amount on the happening of a specified event, being the life insured's Total Disablement which prevents them from Participating in their Occupation ever again. Under the death by Accident cover, a Policy is taken out with the intention to receive the insured amount on the happening of the death of the life insured from an Accident. The Permanent Total Disablement benefit and death benefit payable in the event of the life insured's Permanent Total Disablement and death by Accident respectively, is intended not to compensate for the loss of earnings of the life insured but for the loss of earning capacity of the life insured. 26. 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; 84 ATC 4077; (1984) 15 ATR 242. Such payments are capital in nature. 27. Whether the receipt of a Permanent Total Disablement benefit in regular or periodic instalments (rather than in a lump sum) alters the character of the receipt requires further consideration. While periodicity or recurrence of payments is indicative that a series of payments is ordinary income, it is not definitive in classifying a series of payments: Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443 ( Dixon ) per Fullagar J at CLR 568; ATD 92; AITR 456. 28. In accordance with the principle enunciated in Dixon , an amount paid in substitution for another amount takes the character of the substituted amount. Therefore, any Permanent Total Disablement benefit paid periodically in substitution for a capital payment retains its capital characterisation. 29. Further, compensation for loss of earning capacity does not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the life insured would have earned had they not sustained a Permanent Total Disablement or died as a result of an Accident. 30. Accordingly, the Permanent Total Disablement benefit and death benefit are capital receipts, and are not assessable under section 6-5 as ordinary income. | Permanent Total Disablement benefit and death benefit not assessable as statutory income under section 15-30: 31. Section 6-10 includes statutory income in assessable income (that is, amounts that are not ordinary income but are included in assessable income by another provision). Section 15-30 is one such provision which operates to include in your assessable income an amount received by way of insurance or indemnity for the loss of an amount if the lost amount would have been included in your assessable income and the amount received is not assessable as ordinary income under section 6-5. 32. Both the Permanent Total Disablement benefit and death benefit are payments received by way of insurance. 33. Whether a payment received by way of insurance or indemnity is subject to tax under paragraph 26(j) of the ITAA 1936 (the predecessor to section 15-30 of the ITAA 1997) was considered in Federal Commission of Taxation v. Inkster (1989) 24 FCR 53; (1989) 89 ALR 137; 89 ATC 5142; (1989) 20 ATR 1516 and Groves v. United Pacific Transport Pty. Ltd. and Thompson [1965] Qd R 62. As the compensation paid under these cases was for the loss of earning capacity, as distinct from the loss of income which would have been assessable income if the loss had not occurred, it was held that any payment thus received was not subject to assessment under paragraph 26(j) of the ITAA 1936. For subsection 26(j) of the ITAA 1936 to have applied, it would have been necessary to demonstrate that an actual loss of income suffered by the insured had been indemnified. 34. The Permanent Total Disablement benefit and death benefit are for the loss of the life insured's earning capacity, and not for the loss of income. Any payment received to compensate for the loss of earning capacity is a capital receipt and does not fall to be assessed under section 15-30. | Capital gain or loss from payments under the Policy disregarded: 35. 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 the life insured and Beneficiary under the Policy are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1). 36. Where ATC makes a payment of the Temporary Total Disablement benefit, Permanent Total Disablement benefit or death benefit in satisfaction of the life insured's or Beneficiary's contractual rights under the Policy, their ownership of those rights are discharged or satisfied in whole or part. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b)). 37. The life insured, or the Beneficiary in the event of the life insured's death by Accident, 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)). | Section 118-37 - Temporary Total Disablement benefit and Permanent Total Disablement benefit: 38. 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. 39. A receipt of an amount under an insurance policy for a non-death benefit such as Temporary Total Disablement or Permanent Total Disablement constitutes a form of compensation or damages covered by subparagraph 118-37(1)(a)(ii) where the amount is received for a wrong, injury or illness suffered personally by the recipient or the recipient's relative. 40. Any capital gain or capital loss the life insured makes under section 104-25 upon payment of a Temporary Total Disablement benefit (to the extent that any such capital gain has not already been reduced pursuant to the operation of section 118-20) or Permanent Total Disablement benefit by ATC under the Policy in respect of the Temporary or Permanent Total Disablement suffered by the life insured will be disregarded under subparagraph 118-37(1)(a)(ii). | Section 118-300 - death benefit: 41. Section 118-300 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual. The meaning to be given to the expression 'policy of insurance on the life of an individual' includes, but is not limited to, life insurance policies within the common law meaning of that term. It can apply to other life insurance policies as defined in subsection 995-1(1) but only to the extent that those policies provide for a sum of money to be paid if an event happens that results in the death of an individual (Taxation Determination TD 2007/4). [1] 42. Item 4 of the table in subsection 118-300(1) provides that a capital gain or capital loss you made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 43. A designated Beneficiary would be taken to have acquired rights under the Policy for no consideration. The Beneficiary will therefore be entitled under item 4 in the table in subsection 118-300(1) to disregard any capital gain or capital loss they make under section 104-25 from the receipt of a payment of a death benefit from ATC. | Premiums relating to Temporary Total Disablement deductible: 44. 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; ATC 4117; ATR 542 that: 45. Murphy J delivered a separate judgment but concurred with the view of the majority of their Honours and stated at CLR 587; ATC 4118; ATR 543: 46. As the Temporary Total Disablement benefit is intended to compensate for the loss of earnings of the life insured and would be assessable to the life insured (see paragraphs 21 to 24 of this Product Ruling), premiums incurred by the life insured that relate to Temporary Total Disablement cover are incurred in gaining or producing assessable income and therefore deductible under section 8-1. | Premiums relating to Permanent Total Disablement and death by Accident not deductible: 47. As the Permanent Total Disablement benefit and death benefit are not intended to compensate for the loss of earnings of the life insured but are intended to compensate for the loss of earning capacity of the life insured they are treated as capital (see paragraphs 25 to 30 of this Product Ruling). Premiums incurred by the life insured are not incurred in gaining or producing assessable income to the extent that they relate to Permanent Total Disablement and death by Accident cover, 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 35 of this Product Ruling (subsections 110-25(2) and 110-55(2)). | Part IVA - anti-avoidance: 48. 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. 49. The following is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Not previously issued as a draft


Appendix: Temporary Total Disablement benefit assessable as ordinary income under section 6-5: 21. 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. 22. The characterisation to be accorded to the insurance proceeds payable to the life insured in respect of their Temporary Total Disablement will depend on the purpose of the payments and the circumstances of their receipt: Tinkler v. Federal Commissioner of Taxation (1979) 29 ALR 663; 79 ATC 4641; (1979) 10 ATR 411 per Brennan J at ALR 667; ATC 4644; ATR 414. Under the Temporary Total Disablement cover, a Policy is taken out with the intention to receive the insured amount on the happening of a specified event, being the life insured's Total Disablement which prevents them from Participating in their Occupation for a continuous but finite period. The Temporary Total Disablement benefit payable in the event of the life insured's Temporary Total Disablement is intended to compensate for the loss of the life insured's earnings. 23. 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; [1981] HCA 10; 81 ATC 4114; (1981) 11 ATR 538 ( 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. 24. Accordingly, the payments under the Temporary Total Disablement cover are ordinary income (and not capital receipts), assessable under section 6-5. | Permanent Total Disablement benefit and death benefit not assessable as ordinary income under section 6-5: 25. As is the case in respect of the life insured's Temporary Total Disablement, the characterisation to be accorded to the insurance proceeds payable in respect of the life insured's Permanent Total Disablement and death by Accident will depend on the purpose of the payments and the circumstances of their receipt. Under the Permanent Total Disablement cover, a Policy is taken out with the intention to receive the insured amount on the happening of a specified event, being the life insured's Total Disablement which prevents them from Participating in their Occupation ever again. Under the death by Accident cover, a Policy is taken out with the intention to receive the insured amount on the happening of the death of the life insured from an Accident. The Permanent Total Disablement benefit and death benefit payable in the event of the life insured's Permanent Total Disablement and death by Accident respectively, is intended not to compensate for the loss of earnings of the life insured but for the loss of earning capacity of the life insured. 26. 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; 84 ATC 4077; (1984) 15 ATR 242. Such payments are capital in nature. 27. Whether the receipt of a Permanent Total Disablement benefit in regular or periodic instalments (rather than in a lump sum) alters the character of the receipt requires further consideration. While periodicity or recurrence of payments is indicative that a series of payments is ordinary income, it is not definitive in classifying a series of payments: Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443 ( Dixon ) per Fullagar J at CLR 568; ATD 92; AITR 456. 28. In accordance with the principle enunciated in Dixon , an amount paid in substitution for another amount takes the character of the substituted amount. Therefore, any Permanent Total Disablement benefit paid periodically in substitution for a capital payment retains its capital characterisation. 29. Further, compensation for loss of earning capacity does not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the life insured would have earned had they not sustained a Permanent Total Disablement or died as a result of an Accident. 30. Accordingly, the Permanent Total Disablement benefit and death benefit are capital receipts, and are not assessable under section 6-5 as ordinary income. | Permanent Total Disablement benefit and death benefit not assessable as statutory income under section 15-30: 31. Section 6-10 includes statutory income in assessable income (that is, amounts that are not ordinary income but are included in assessable income by another provision). Section 15-30 is one such provision which operates to include in your assessable income an amount received by way of insurance or indemnity for the loss of an amount if the lost amount would have been included in your assessable income and the amount received is not assessable as ordinary income under section 6-5. 32. Both the Permanent Total Disablement benefit and death benefit are payments received by way of insurance. 33. Whether a payment received by way of insurance or indemnity is subject to tax under paragraph 26(j) of the ITAA 1936 (the predecessor to section 15-30 of the ITAA 1997) was considered in Federal Commission of Taxation v. Inkster (1989) 24 FCR 53; (1989) 89 ALR 137; 89 ATC 5142; (1989) 20 ATR 1516 and Groves v. United Pacific Transport Pty. Ltd. and Thompson [1965] Qd R 62. As the compensation paid under these cases was for the loss of earning capacity, as distinct from the loss of income which would have been assessable income if the loss had not occurred, it was held that any payment thus received was not subject to assessment under paragraph 26(j) of the ITAA 1936. For subsection 26(j) of the ITAA 1936 to have applied, it would have been necessary to demonstrate that an actual loss of income suffered by the insured had been indemnified. 34. The Permanent Total Disablement benefit and death benefit are for the loss of the life insured's earning capacity, and not for the loss of income. Any payment received to compensate for the loss of earning capacity is a capital receipt and does not fall to be assessed under section 15-30. | Capital gain or loss from payments under the Policy disregarded: 35. 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 the life insured and Beneficiary under the Policy are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1). 36. Where ATC makes a payment of the Temporary Total Disablement benefit, Permanent Total Disablement benefit or death benefit in satisfaction of the life insured's or Beneficiary's contractual rights under the Policy, their ownership of those rights are discharged or satisfied in whole or part. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b)). 37. The life insured, or the Beneficiary in the event of the life insured's death by Accident, 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)). | Section 118-37 - Temporary Total Disablement benefit and Permanent Total Disablement benefit: 38. 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. 39. A receipt of an amount under an insurance policy for a non-death benefit such as Temporary Total Disablement or Permanent Total Disablement constitutes a form of compensation or damages covered by subparagraph 118-37(1)(a)(ii) where the amount is received for a wrong, injury or illness suffered personally by the recipient or the recipient's relative. 40. Any capital gain or capital loss the life insured makes under section 104-25 upon payment of a Temporary Total Disablement benefit (to the extent that any such capital gain has not already been reduced pursuant to the operation of section 118-20) or Permanent Total Disablement benefit by ATC under the Policy in respect of the Temporary or Permanent Total Disablement suffered by the life insured will be disregarded under subparagraph 118-37(1)(a)(ii). | Section 118-300 - death benefit: 41. Section 118-300 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual. The meaning to be given to the expression 'policy of insurance on the life of an individual' includes, but is not limited to, life insurance policies within the common law meaning of that term. It can apply to other life insurance policies as defined in subsection 995-1(1) but only to the extent that those policies provide for a sum of money to be paid if an event happens that results in the death of an individual (Taxation Determination TD 2007/4). [1] 42. Item 4 of the table in subsection 118-300(1) provides that a capital gain or capital loss you made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 43. A designated Beneficiary would be taken to have acquired rights under the Policy for no consideration. The Beneficiary will therefore be entitled under item 4 in the table in subsection 118-300(1) to disregard any capital gain or capital loss they make under section 104-25 from the receipt of a payment of a death benefit from ATC. | Premiums relating to Temporary Total Disablement deductible: 44. 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; ATC 4117; ATR 542 that: 45. Murphy J delivered a separate judgment but concurred with the view of the majority of their Honours and stated at CLR 587; ATC 4118; ATR 543: 46. As the Temporary Total Disablement benefit is intended to compensate for the loss of earnings of the life insured and would be assessable to the life insured (see paragraphs 21 to 24 of this Product Ruling), premiums incurred by the life insured that relate to Temporary Total Disablement cover are incurred in gaining or producing assessable income and therefore deductible under section 8-1. | Premiums relating to Permanent Total Disablement and death by Accident not deductible: 47. As the Permanent Total Disablement benefit and death benefit are not intended to compensate for the loss of earnings of the life insured but are intended to compensate for the loss of earning capacity of the life insured they are treated as capital (see paragraphs 25 to 30 of this Product Ruling). Premiums incurred by the life insured are not incurred in gaining or producing assessable income to the extent that they relate to Permanent Total Disablement and death by Accident cover, 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 35 of this Product Ruling (subsections 110-25(2) and 110-55(2)). | Part IVA - anti-avoidance: 48. 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


Related rulings: TD 2007/4
Legislative references: ITAA 1936 ITAA 1936 26(j) ITAA 1936 51(1) ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 6-5 ITAA 1997 6-10 ITAA 1997 8-1 ITAA 1997 15-30 ITAA 1997 104-25 ITAA 1997 104-25(1)(b) ITAA 1997 104-25(3) ITAA 1997 108-5(1) ITAA 1997 110-25(2) ITAA 1997 110-55(2) ITAA 1997 118-20 ITAA 1997 118-37 ITAA 1997 118-37(1)(a)(ii) ITAA 1997 118-300 ITAA 1997 118-300(1) ITAA 1997 995-1 ITAA 1997 995-1(1) Life Insurance Act 1995 SISA 1993 TAA 1953
Case references: Federal Commission of Taxation v. Inkster (1989) 24 FCR 53 (1989) 89 ALR 137 89 ATC 5142 (1989) 20 ATR 1516