Edited version of private ruling

Authorisation Number: 1011592020199

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Ruling

Subject: Foreign life policy

Is the lump sum assured amount received on surrendering your foreign life policy (FLP) assessable income?

No.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You became a resident of Australia for tax purposes.

You had an investment bond policy with Company X.

Company X is based in Country A.

The policy commenced after 1 July 1992.

The policy was initially issued by Company B. They were taken over by Company A. The funds were unchanged.

Your policy was a single payment, unit linked, whole of life assurance plan. Its aim was to provide you with growth over the medium to long term and life cover if you die. You could take money out, surrender it in full, or set up regular cash withdrawals at any time.

You were the sole contributor and your life was assured through the policy.

The cash value when you surrendered the policy was greater than (AUD) $50,000.

You received a gain when you surrendered the policy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 104-5.

Income Tax Assessment Act 1997 Section 118-300.

Income Tax Assessment Act 1936 Section 482.

Income Tax Assessment Act 1936 Subsection 485(4).

Income Tax Assessment Act 1936 Subsection 483(3).

Income Tax Assessment Act 1936 Subsection 515(1).

Income Tax Assessment Act 1936 Section 529.

Reasons for decision

Summary

The lump sum assured amount you received on surrender of your FLP is not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 118-300 of the ITAA 1997 provides that if a capital gains tax (CGT) event happens to a life insurance policy, any capital gain or loss made from it by the beneficial owner of the policy is ignored for CGT purposes.

The increase in value of your FLP in the year of surrender is included in your assessable income. You will need to request an amendment to your tax return for the income year ended 30 June 2009.

As you became a resident of Australia for tax purposes, you will need to request an amendment to your tax returns for those years where there was an increase in the value of the policy even if no amount was received by you.

Detailed reasoning

Foreign investment fund (FIF) income is included in statutory income under section 529 of the Income Tax Assessment Act 1936 (ITAA 1936). The FIF measures can apply to a taxpayer's interest in a FLP.

The intent of the FIF measures is to tax Australian resident taxpayers on an accruals basis on the growth in value of, among other things, life insurance policies, issued by foreign resident entities, which have an investment component. The FIF measures may therefore apply to include in your assessable income an amount even though you have not received anything.

A FLP is defined in section 482 of the ITAA 1936 as a life assurance policy issued by an entity that was not a resident of Australia at any time in that year of income. There are four exclusions from the definition of a life assurance policy for the purposes of the FIF measures:

(a) an Australian policy

(b) policies providing payment on death or permanent disability only

(c) policies issued before 1 July 1992 which cannot after that date be cancelled, surrendered or redeemed and for which the terms have not after that date been altered in a material way

(d) a contract of reinsurance between a resident insurer and a non resident insurer in relation to life assurance policies which provide only life cover.

None of the above exclusions apply to you. Your policy was not an Australia policy. Your policy did not provide payment of money on death only. Your policy commenced after 1 July 1992 and it could be cancelled, surrendered or redeemed. There is no evidence of a contract or reinsurance between a resident insurer and a non resident insurer in your case.

Accordingly, your foreign life insurance policy is considered to be a FLP as defined.

Subsection 485(4) of the ITAA 1936 provides that the FIF measures apply to a FLP where the following conditions exist:

· the taxpayer had an interest or interests in a FLP

· the year of income is the 1992/1993 or a later year of income, and

· the taxpayer was an Australian resident at any time in that year of income.

Subsection 483(3) of the ITAA 1936 then provides that a person has an interest in a FLP if the person has the legal title to the FLP. As you are an Australian resident and have legal ownership of the policy, you have an interest in a FLP.

Paragraph 73 of Taxation Ruling TR 2004/3 which deals with the taxation of FLPs provides that for the purposes of subsection 515(1) of the ITAA 1936, the value at the end of the year of income or a person's interest in a FIF or FLP is taken to be:

· the cost incurred by the person in acquiring the interest in the FIF or FLP, or

· the market value of the interest in the FIF or FLP, as at the end of the year of income; whichever is the greater amount.

As the value of your policy exceeds (AUD) $50,000 the small investor exemption does not apply in your case. Therefore, the increase in value of your FLP in the year of surrender needs to be included in your assessable income. You will need to request an amendment to your tax return for the income year ended 30 June 2009.

Note

As you became a resident of Australia for tax purposes, you will need to request an amendment to your tax returns for those years where there was an increase in the value of the policy even if no amount was received by you.

Tax implication on lump sum received at the time of surrender

The lump sum assured amount from a life assurance policy is not ordinary income. It does not have the characteristics of ordinary income. The payment is received in a lump sum, therefore there is no element of periodicity, recurrence or regularity, and does not relate to personal services, property or the carrying on of a business.

Therefore, the lump sum assured amount you received on surrender of your FLP is not assessable under section 6-5 of the ITAA 1997.

Capital gains tax

A capital gain or capital loss may be made if a CGT event happens to a CGT asset. An insurance policy is a CGT asset. An increase in value of an investment is not a CGT event. The surrender of a life insurance policy gives rise to a CGT event (section 104-5 of the ITAA 1997 CGT event C2).

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 the beneficial owner of the policy is ignored for CGT purposes.

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