Edited version of private ruling

Authorisation Number: 1011736173713

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Ruling

Subject: Assessable Income - whole of life insurance and endowment

Question 1

Does the activation of the conversion feature of a 'whole life' insurance policy to an 'endowment assurance' policy, where the commencement of risk was before 27 August 1982, activate the 10 year rule under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936), making the payments and bonuses assessable income?

Answer

No

Question 2

Are you entitled to maintain the tax free status of a policy which was legally transferred to you for nil consideration when the commencement of risk on the policy was before 27 August 1982?

Answer

Yes

This ruling applies for the following period

1 July 2011 to 30 June 2013

The scheme commenced

Before 27 August 1982

Relevant facts and circumstances

You have three whole life insurance policies with special conditions for conversion to endowment assurance policies.

The policies were started in 19XX, 19YY and 19ZZ.

The policies were started as life insurance policies and as a means of retirement savings.

The first policy initially recorded your parent as the grantee (the beneficiary of the policy) and the subsequent policies recorded yourself as the grantee.

In each policy you are nominated as the life assured.

Following the death of one of your parents in 200X legal transfer occurred of the first whole life insurance policy to you.

You exercised the option to convert the two policies paid for by yourself in 200Y and 200Z and there was no mention from your insurance advisor about a possible future tax liability arising from the conversion of the whole of life policies to endowment assurance policies.

When you enquired about exercising your option to convert the remaining policy to an endowment assurance policy you were advised of a potential income tax liability arising from 'any payment you receive' unless the policy is kept for a further 10 years after the date of conversion.

The policies were designed and intended to be retirement savings accounts.

During the term of all the policies the premiums have remained constant therefore not breaching the 25% yearly increase rule to reset the '10 year tax free rule'.

The payment to be received from the whole of life or the endowment assurance policy is in the nature of a lump sum.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 26AH

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-75

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 118-300

Income Tax Assessment Amendment Act 1984

Assumptions

It is assumed that the first insurance policy which commenced in 19XX and which was acquired by you in 200X was acquired for nil consideration.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Reasons

Question 1

Summary

The policies you hold are not considered to be 'eligible policies' with regard to the bonuses you may receive on the policies regardless of whether the policy has been converted from a whole of life policy to an endowment assurance policy as permitted by the special provisions of the policy undertaken.

No income arising from the policy, whether it is a capital receipt or a bonus will be considered assessable income,

Detailed reasoning

The lump sum proceeds of a life assurance or endowment assurance policy are capital and not assessable as income even though they may be received in more than one instalment of the fixed capital sum. Similarly, an amount received on the surrender of such a policy is capital.

Section 26AH was inserted in the ITAA 1936 by the Income Tax Assessment Amendment Act 1984 (Act No. 14 of 1984) which received Royal Assent on 12 April 1984. The section provides for the taxing of amounts paid as or by way of bonuses under life assurance policies taken out after 27 August 1982, and which are not subject to tax under any other provision of the income tax law.

Section 26AH of the ITAA 1936 provides that a taxpayer's assessable income shall include bonuses, and some other amounts in the nature of bonuses, received under a relevant life assurance policy (an eligible policy) during a specified period (the eligible period). An eligible policy is defined to mean a policy of life assurance in relation to which the date of 'commencement of risk' is after 27 August 1982, while the date of commencement of risk in relation to an eligible policy is -

· the date of commencement of the period to which the first or only premium paid under the policy relates; or

· where the first or only premium does not relate to a particular period, the date of payment of that premium.

The eligible period in respect of an eligible policy is the first 10 years in the case of a policy with a date of commencement of risk after 7 December 1983 or the first 4 years where the date of commencement of risk is after 27 August 1982 and on or before 7 December 1983.

For eligible policies, the Commissioner's view on the assessability of bonuses and other payments where a policy is converted to a different policy table such as a whole of life to an endowment assurance policy is covered in Taxation Ruling IT 2346. Paragraph 14 of that ruling indicates that if an eligible policy is converted to a different table a new eligible policy is created.

In your case, the date of commencement of risk for your life insurance policy was before 27 August 1982, and as such it is not considered an eligible policy. As a result, section 26AH of the ITAA 1936 does not apply to your circumstances.

Subsection 118-300(1) Item 3 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or loss made from a capital gains tax (CGT) event (such as the surrender of a policy) is disregarded under a policy of insurance on the life of an individual and you are the original beneficial owner of the policy.

Taxation Determination TD 2007/4 discusses the nature of policies which are considered to be included by the term 'policy of insurance on the life of an individual' and the lump sum proceeds received from an endowment life policy are included as detailed in Example 4 which states:

Jesse was the original beneficial owner of an endowment life insurance policy. Jesse received a lump sum payment under the policy when he attained 60 years of age.

On receipt of the payment under the policy, CGT event C2 in section 104-25 happened. Any capital gain or loss that Jesse makes as a result of CGT event C2 happening is disregarded under section 118-300 because the payment was made on the happening of an event that was contingent on the duration of human life.

Because the dates for the 'commencement of risk' for the whole of life policies was prior to 27 August 1982 the conversion of the policies to endowment assurance policies by exercising an option available in the original policies does not create new eligible policies for the purposes of section 26AH of the ITAA 1936.

Question 2

Summary

You are entitled to maintain the tax free status of a policy which was legally transferred to you for nil consideration.

Detailed reasoning

Subsection 118-300(1) Item 4 of the ITAA 1997 states that a capital gain or loss made from a CGT event (such as the surrender of a policy) is disregarded under a policy of insurance on the life of an individual and you are an entity that acquired the interest in the policy or instrument for no consideration.

Example 2 of Item 4 above states:

Peter is the original beneficial owner of the rights under a policy of insurance on the life of an individual. He transfers the rights to his spouse for nothing. There are no CGT consequences for him and none for his spouse if he dies.

Subsequent to the disregarding of the transfer of beneficial rights for CGT purposes it then follows that the date for the commencement of risk is maintained (in this case the year is 19XX) and any bonuses received on the life assurance or endowment assurance policy are not assessable income.

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