AAT reviews ATO decision on lump sum payment
The Administrative Appeals Tribunal has reviewed a decision by the Commissioner of Taxation which ruled that a lump sum payment made to a taxpayer by his insurers to settle claims made against them was fully assessable.
In the case of Kort and Commissioner of Taxation (Taxation) [2019] AATA 336, the applicant applied for a review of a decision made by the Commissioner of Taxation to disallow the applicant’s objection to a private binding ruling made on 17 August 2016.
The effect of the ruling was that a lump sum payment of $803,000, made to him by his insurers to settle claims made against the insurers, was fully assessable to him in the income year ended 30 June 2016.
The AAT also considered whether the $803,000 is exempt from capital gains tax (CGT) under section 118-37(1)(a) of the Income Tax Assessment Act 1997 (Cth) because the sum is a capital gain relating directly to compensation or damages for a wrong, injury or illness suffered by the applicant personally.
The private binding ruling that the applicant had applied for was in relation to a settlement sum he received under a release agreement between himself and Zurich Australia Limited (ZAL) and Zurich Australia Superannuation Pty Limited (ZAS).
The release agreement concerned claims made by the applicant against ZAL and ZAS in relation to income replacement benefits under an income protection policy and total and permanent disability (TPD) payments, under a term life insurance policy, according to the AAT decision.
ZAL had paid the applicant the sum of $1,100,000, inclusive of any applicable taxes, costs and interest.
In terms of the proceeding relating to the TPD claim, ZAL agreed to pay Zurich Australia Superannuation Pty Limited $297,000 inclusive of any applicable taxes, costs and interest, to be preserved for the releasor in the fund in accordance with the trust deed and rules incorporating the fund and the Superannuation Industry (Supervision) Act 1999 (Cth) and any applicable regulations.
ZAL also agreed to pay the balance of the settlement sum, being the sum of $803, inclusive of any applicable taxes, costs and interest to the releasor.
The applicant submitted that the payment was a single undissected lump sum which cannot be dissected into two distinct amounts applicable to the TPD claim and the income protection policy claim.
The AAT stated that if the applicant is correct, then on the basis of legal authority, the whole payment is to be treated as capital in nature and does not form part of the applicant’s assessable income.
The AAT determined that the payment of $803,000 to the applicant was not apportioned exclusively to compensate the applicant for the loss of income benefits, but rather was paid to compensate the applicant for all claims, other than the TPD claim, including a claim for loss and damage caused by the insurers’ conduct.
“As a result, it constituted a single undissected sum settling all remaining non-TPD claims with the effect that the whole of the payment was capital in nature,” it stated.
The AAT, therefore, set aside the discussion under review and it remitted to the respondent that the lump sum payment of $803,000 was not assessable to the applicant in the income year ended 30 June 2016.
The AAT did, however, find that ITAA did not apply to the lump sum amount of $803,000, and therefore it was not exempt from CGT.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
