ATO Interpretative Decision
ATO ID 2002/453 (Withdrawn)
Exempt income - surrender of a sickness insurance policy
FOI status: may be released
Status of this decision: Decision withdrawn 22 September 2017.
|CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.|
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Is a payment received by the taxpayer on the surrender of an insurance policy assessable income under section 6-5 or section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. A payment received by the taxpayer on the surrender of an insurance policy is not assessable under section 6-5 or section 102-5 of the ITAA 1997 and it is excluded from assessable income by section 6-15 of the ITAA 1997.
The taxpayer is a resident of Australia for tax purposes.
The taxpayer surrendered their sickness insurance policy, sourced in the United Kingdom.
The taxpayer received a payment of less than $50 000 on surrender of the policy.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has generally been held to include 3 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.
A lump sum payment received from the surrender of a sickness insurance policy does not relate to personal services, property, or the carrying on of a business. The lump sum more correctly relates to the personal circumstances of the taxpayer. 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 within which personal services are performed. Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income, and are also included in assessable income.
The surrender or discharge of a sickness or life insurance policy gives rise to a CGT event (section 104-5 of the ITAA 1997 - CGT Event C2). However, subsection 118-300(1) of the ITAA 1997 provides that if a CGT event happens to a life insurance policy and the taxpayer is the original beneficial owner of the policy, the amount received as a result of the event is disregarded.
The taxpayer is the original beneficial owner of the policy and the surrender of the policy constituted a CGT event. The lump sum payment received as a result of the surrender of the taxpayer's sickness insurance policy is disregarded and therefore excluded from the taxpayer's assessable income.
In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws but any applicable double tax agreement contained n the International Tax Agreements Act 1953 (the Agreements Act).
Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the United Kingdom (the United Kingdom Agreement). The United Kingdom Agreement operates to avoid the double taxation of income received by Australian and United Kingdom residents.
The United Kingdom Agreement is silent as to taxation of payments received on the surrender of an insurance policy. Thus, the payments received are subject to the income tax laws of Australia, where applicable.
The lump sum payment received by the taxpayer on surrender of their sickness insurance policy is not assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. The lump sum payment 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 in Australia.
Date of decision: 12 March 2002
Income Tax Assessment Act 1997
International Tax Agreements Act 1953
Accident and disability insurance
Capital gains tax
Siebel/TDMS reference number: DW282154
Business line: Small Business/Individual Taxpayers
Date of publication: 17 April 2002