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Edited version of your private ruling
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Ruling
Subject: Surrender of investment policies
Question 1
Will you be required to include any money received in your income as a result of surrendering a number of investment policies in income tax return?
Answer
No.
Question 2
Are you entitled to include the loss you made on surrendering a number of investment policies in your income tax return?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2012
The scheme commences on:
Prior to the year 2000
Relevant facts and circumstances
You took out an investment plan prior to the year 2000.
You paid a number of premiums.
You surrendered this policy and received a payment. You made a profit on this policy.
You also took out another policy with your spouse prior to the year 2000.
You paid a number of premiums.
You made a net loss on the policy. You shared this loss with your spouse.
You made a net loss.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 26AH,
Income Tax Assessment Act 1936 Section 15-75 and
Income Tax Assessment Act 1936 Section 118-300.
Reasons for decision
Question 1
Summary
You will not be required to include money received as a result of surrendering your investments policies in your income for the relevant year.
Detailed reasoning
Generally, bonuses received are assessable under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) however, reversionary bonuses on a policy of life assurance are not assessable. The bonuses on an endowment policy are considered to be reversionary bonuses as they are not actually paid out to the taxpayer but are reinvested to be part of the lump sum.
Reversionary bonuses are fully assessable under subsection 26AH(6) of the ITAA 1936 if the life assurance policy is cashed in during the first eight years of the eligible period, two thirds assessable if cashed in the ninth year and one third assessable if cashed in during the tenth year. This is the ten year period commencing on the date of the commencement of risk, being the period in respect of which the date of the first premium was paid. If the policy matures or is otherwise terminated after ten years, section 26AH of the ITAA 1936 excludes reversionary bonuses from being assessable.
In your case, as you and your spouse have held the policies for greater than ten years, the reversionary bonuses received on the surrender of your plans is not assessable.
Question 2
Summary
You are not entitled to claim the loss you incurred on the surrender of your investment policies.
Detailed reasoning
Generally, bonuses received are assessable under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) however, reversionary bonuses on a policy of life assurance are not assessable. The bonuses on an endowment policy are considered to be reversionary bonuses as they are not actually paid out to the taxpayer but are reinvested to be part of the lump sum.
Reversionary bonuses are fully assessable under paragraph 26AH(6) of the ITAA 1936 if the life assurance policy is cashed in during the first eight years of the eligible period, two thirds assessable if cashed in the ninth year and one third assessable if cashed in during the tenth year. This is the ten year period commencing on the date of the commencement of risk, being the period in respect of which the date of the first premium was paid. If the policy matures or is otherwise terminated after ten years, section 26AH of the ITAA 1936 excludes reversionary bonuses from being assessable. Section 26AH of the ITAA 1936 is only applicable to reversionary bonuses received by the taxpayer and does not address a loss being incurred.
In your case, as you and your spouse have held the policies for greater than ten years and did not receive a bonus payment. As you have held the investment for greater than ten years and incurred a loss, the loss incurred on the surrender of your plans is not able to be claimed.
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