Taxation Assignment

Question 1

1.1

Issue

Determine if the disability benefit paid by the insurer to the bank is assessable income to your client. Your answer should reference all applicable sections of the Income Tax Assessment Act 1936 and/or the Income Tax Assessment Act 1997, related cases and/or rulings or other relevant materials from the Australian Taxation Office.

Facts

-Client #1 is a resident of Australia for income tax purpose;

-client has a mortgage protection insurance policy with Mortgage Insurance Australia;

-A housing loan values $5000,000 in relation to the mortgage protection insurance policy;

-Client #1 suffers a heart attack and is unable to perform their usual occupation for a period of seven months due to illness;

-In accordance with the term of the mortgage protection policy, the insurance company pays client #1’s bank the monthly disability benefits as set out the policy;

-The payment to the bank from the insurance company is $30,000.

Relevant law
Section 6.5 of the Income Tax Assessment Act 1997 (the ITAA 1997) states that the assessable income includes income according to ordinary, which is called ordinary income.

Federal Coke Co Pty Ltd v FCT (1977) 7 ATR 519; 77 ATC 4255 is an authority for the proposition that for a receipt to be income, it must either:

• have the characteristics of ordinary income such as regular or periodic receipt;
• have a nexus with an earning source (property, business and personal exertion);
• be received as compensation for or in substitution for what clearly would have been an income amount.

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.

Section 118-37(1)(a) of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event relating directly to compensation or damages is disregarded if:

• any wrong or injury you suffer in your occupation; or
• any wrong, injury or illness you or your relative suffers personally;

Application of Law

• The disability benefit paid by the insurer to the bank is not ordinary income under section 6.5 of the ITAA 1997

• Evidenced by that the payments client #1 received under the insurance policy is a one-off insurance compensation rather than a regular and periodic receipt;
• The payments do not involve any personal exertion (the payments have no nexus with an client providing services);
• the payments paid by the insurer is not ordinary income.

• Section 118-37(1)(a) applies.

• The disability benefit received is more like a capital receipt in this case. The payment relates to personal circumstances that have arisen during the client’s life. Since the client #1 suffers a heart attack and is unable to perform the usual occupation, the insurer paid the $30,000 to fulfill the taxpayer’s repayments. The insurance company paid client #1 the monthly disability benefit as set out in the policy as a compensation for loss of physical abilities. The compensation or damages payments relating to the taxpayer personally will be exempt from capital gains tax implication under section 118-37(1)(b) of the ITAA 1997, which means the disability benefit is non-CGT gains.

Conclusion

The $30,000 insurance payment paid by the insurer is not assessable income in this case because failed all the requirements to be assessable income; furthermore the payment is considered to be an exempt capital gain under section 118-37 of the ITAA 1997.

1.2

Issue

Determine if the lump sum paid by the insurer to your client is assessable income under the ITAA 1936 and/or the ITAA 9197 or relevant cases and rulings.

Facts

• Taxpayer has an income protection policy;
• Insurance company will pay a lump sum to the taxpayer when they are diagnosed with a terminal illness or suffer one of a number of listed trauma events; having a heart attack is one of the listed trauma events;
• The insurance company pays a lump sum $150,000 to the taxpayer in February 2017 which is equal to 12 months of a predetermined monthly benefit and be paid once only.

Relevant law

Section 6.5 of the ITAA 1997 states that the assessable income includes income according to ordinary, which is called ordinary income.