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Authorisation Number: 1011829105592

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Ruling

Subject: Life insurance payout

Question

Are the proceeds from the life insurance policy assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You, a company, had an insurance policy taken out on the life of a director.

The insurance policy was a term policy.

The policy was taken out so that there was money available to repay debts.

The insured director died and a payment was received from the insurance company.

You have claimed deductions for the premiums paid for the policy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5 and
Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident includes ordinary income, derived directly and indirectly from all sources in or out of Australia.

Income Tax Ruling IT 155 provides guidance as to the assessability and deductibility of premiums paid and payouts received in respect of key man life insurance. The term key man insurance is used in the industry to denote insurance on the life of a director, partner, employer or other key person associated with the taxpayer in business.  

It has been the practice as stated in IT 155 in relation to insurance policies taken out by employers in respect of their employees to treat the premiums as deductible under section 8-1 of the ITAA 1997 and the proceeds as assessable income if a term policy is involved.

The insurance policy in your situation is considered to be a term life insurance policy.

Paragraph 9 of IT 155 provides examples of situations in which premiums on term policies would not be deductible and the proceeds would not represent income. These include:

· 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.

As you haven't provided any evidence to satisfy any of these exceptions, it is determined that the premiums paid are deductible and the proceeds are assessable income.

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