Edited version of private ruling

Authorisation Number: 1011560535938

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Ruling

Subject: CGT - life insurance policy

Question 1

Would any proceeds from the realisation of the insurance policy be assessable to the trustee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Could the trustee apply the CGT exemption under section 118-300 of the ITAA 1997 to proceeds from the realisation of the insurance policy?

Answer

Yes

Question 3

Would any distribution to the beneficiaries, resulting from an excess of proceeds from the insurance policy over the deceased's shareholding, be exempt from income tax under subsection 99B(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The shareholders of a private company (the company) entered into a shareholders deed (the deed). The deed provided for the acquisition of each individual shareholders interest in the company in the event of their death.

The deed provides that life insurance policies over each of A, B and C (individual shareholders of the company) are to be held in trust with the beneficiary of the policies being the trust.

Under the deed the shareholders are required to take out life insurance policies equal to the value of their shareholding. For the purposes of the policies, the shareholdings are valued annually.

Upon the death of any of the shareholders the life insurance policy payout will be provided to the deceased's estate as consideration for the acquisition of the shares of the deceased.

Under the deed, in the event of the death of a shareholder, the trustee will obtain the relevant policy proceeds and purchase the deceased's shareholding in the company from these proceeds by obtaining the transfer of the shareholding from the deceased's legal representative.

Under the deed any excess proceeds remaining from the life insurance policy after purchase of deceased's shareholding would be distributed amongst the beneficiaries and the deceased estate.

The insurance policies

An insurance plan with X was entered into prior to the execution of the deed.

The insured persons were A, B and C.

The insurance plan owners were A, B, C and D.

Each was insured for death cover and terminal illness cover. C was also insured for disablement lump sum cover.

B remained insured under this plan. Prior to the execution of the deed A and C exited the plan and changed insurers though they remain plan owners under the X policy.

A entered into a plan with Y. The insurance policy owners are: A, B, C and D. Under the plan A has life cover.

C entered into a plan with Y. The insurance policy owners are A, B, C and D. Under the plan C has life cover and TPD cover.

Copies of the life insurance policies were provided which form part of the facts.

A copy of the shareholders deed has been provided which forms part of the facts.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 118-300

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 99B

Income Tax Assessment Act 1936 Subsection 99B(1)

Income Tax Assessment Act 1936 Subsection 99B(2)

Income Tax Assessment Act 1936 Paragraph 99B(2)(b)

Further issues for you to consider

We have limited our ruling to the questions raised in your application. There may be related issues that you should consider including:

· Any tax consequences for the trust and trust beneficiaries of receiving compensation or damages in relation to the TPD policy of C, and

· Any tax consequences for a deceased estate in receiving trust distributions or the payment for the deceased shares.

You may apply for another ruling on this or any other matter.

Reasons for decision

Question 1

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.

Paragraph 7 of Taxation Ruling IT 155 Key Man Insurance - assessability of proceeds and deductibility of premiums sets out that in deciding whether the proceeds of an accident or term policy are assessable income it would be appropriate to work on the broad proposition, as the High Court did in the Carapark Holdings case, that -

in general, insurance moneys are to be considered as received on revenue account where the purpose of the insurance was to fill the place of a revenue receipt which the event insured against has prevented from arising or of any outgoing which has been incurred on revenue account in consequence of the event insured against, whether as a legal liability or as a gratuitous payment actuated only by consideration of morality or expediency.

Paragraph 9 of IT 155 provides examples of situations in which the proceeds from term policies would not represent income:

· insurance taken out by a company in respect of a director for the purpose of providing, in the event of death by accident, funds for the payment to his estate of a debt owing to the director

· insurance taken out by one partner in respect of another for the purpose of providing in the event of the other partner's death by accident, funds to buy out his estate's interest in the partnership, and

· insurance taken out by a manufacturer in respect of a supplier of components for the purpose of providing, in the event of the supplier's death by accident, funds to buy the supplier's business.

In this case the shareholders have taken out life insurance under a business succession arrangement with a view to control the right to buy the shares of any deceased shareholder and as a provision for monies to pay for such shares. Proceeds from the policies would not be considered to be income assessable under subsection 6-5(2) of the ITAA 1997.

Question 2

There are exemptions for certain capital gains made from CGT events happening to insurance policies set out in section 118-300 of the ITAA 1997.

Under item 4 of the table in section 118-300 of the ITAA 1997 a capital gain you make from a CGT event happening in relation to a CGT asset that is your interest in rights under a life insurance policy is disregarded if:

· the CGT event happens to a policy of insurance on the life of an individual, and

· you are an entity that acquired the interest in the policy for no consideration.

The relevant entity that holds the policies is the trust. The trust took ownership of the policies when the deed was executed. Under the deed, ownership of the policies was transferred from the existing policy owners to the trust for no consideration. There was no change in policy plan owner between the start date of each of the policies and the date the deed was executed.

The trust can disregard a capital gain that arises from a CGT event under item 4 of the table in section 118-300 of the ITAA 1997. This exemption is limited to certain CGT events, CGT event A1 and C2 are included (subsection 118-300(2) of the ITAA 1997).

On the facts provided, the original plan owners of each of the policies were A, B, C and D in their capacity as individuals, as opposed to plan owners in their capacity as trustees of a trust. The certificates and policy plans provided do not indicate the plan owners are acting in a capacity as trustees of a trust (as a result item 3 of the table in section 118-300 of the ITAA 1997 is not applicable).

Note: This ruling does not consider any proceeds that may be received under a TPD policy. Proceeds received under a disability or trauma insurance policy are not exempted under section 118-300 of the ITAA 1997. A disability or trauma insurance policy does not meet the definition of 'life policy'. Section 995-1 of the ITAA 1997 defines life insurance policy to have the meaning given to the expression 'life policy' in section 9 of the Life Insurance Act 1995. A life insurance agreement between the life insured and the insurer is intended to last for a period of years. The terms and conditions of the life policy remain in force for the period of the policy. By contrast, accident and disability (sickness) policies are annual contracts.

Question 3

According to the deed any excess proceeds remaining from the life insurance policy after purchase of deceased's shareholding would be distributed amongst the beneficiaries and the deceased estate.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents:

· amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer (paragraph 99B2(B) of ITAA 1936)

Commonly when an insurance policy is terminated it will result in CGT event C2 (section 104-25 of the ITAA 1997). The CGT provisions can operate to tax gains on termination of life insurance policies. 

However, section 118-300 of the ITAA 1997 provides that if a CGT event happens to a life insurance policy, any capital gain or loss made from it by either the beneficial owner of the policy or an entity that acquired the policy for no consideration is ignored for CGT purposes.

In this case, as discussed above in question 2, the trust is an entity that acquired the policy for no consideration. Therefore under section 118-300 of the ITAA 1997 the capital gain would not be included in the assessable income of the trust.

The exemption would also apply if the taxpayers (the beneficiaries of the trust) were the policy plan owners in their capacities as individuals and they were paid policy funds directly. Any capital gain derived from the policy would be exempt as they would be the original beneficial owners of the policy.

Further, as the payment is not ordinary income (Taxation Ruling IT 155), the payment would not be included in the taxpayer's assessable income under section 6-5 of the ITAA 1997 had the taxpayer held the policy directly.

Therefore, paragraph 99B(2)(b) of the ITAA 1936 will apply to exclude any excess distribution from the trust arising from the life insurance policy payout from the beneficiaries assessable income.

Consequently, the amount is not included in the beneficiaries' assessable income under section 99B of the ITAA 1936.

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