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Ruling

Subject: GST and the purchase of life settlement rights

Question 1

Is the acquisition of an interest in the policies by the entity from the supplier a GST-free acquisition-supply under item 4, paragraph (a) of the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The acquisition of the interests in the policies by the entity is a GST-free acquisition-supply.

Question 2

Are the proceeds received by the entity upon maturity of a policy consideration for a taxable supply made by the entity?

Answer

The entity does not make a taxable supply when it receives proceeds upon the maturity of a life policy.

Question 3

omitted

Question 4

omitted

Question 5

omitted

Relevant facts and circumstances

The supplier was the owner and beneficiary of a number of specified life insurance policies. The life policies were issued by insurers located in the another country and were 'whole of life' policies over residents of that country. The interests in the life policies were held by a third party as a kind of custodian.

A sale agreement was entered into by the entity and the supplier. Essentially, the sale agreement resulted in the entity becoming the beneficial owner of the life policies. The custodian of the policies remained the same.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5,

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(3),

A New Tax System (Goods and Services Tax) Act 1999 Division 11,

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(2),

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(1),

A New Tax System (Goods and Services Tax) Act 1999 section 40-5,

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40–5.09(1),

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40–5.09(3,

Reasons for decision

Issue 1

Question 1

Summary

The acquisition of an interest in the life policies by the entity is a GST-free acquisition-supply under item 4, paragraph (a) of the table in subsection 38-190(1) of the GST Act.

Detailed reasoning

Financial Supply

An acquisition-supply is not an ordinary supply, it is a deemed supply which occurs when an entity makes an acquisition of a financial interest that satisfies the requirements under subregulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Subregulation 40-5.09(1) of the GST Regulations states:

1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

a) the provision, acquisition or disposal is:

I. for consideration; and

II. in the course or furtherance of an enterprise; and

III. connected with Australia; and

b) the supplier is:

I. registered or required to be registered; and

II. a financial supply provider in relation to supply of the interest.

The table in subregulation 40-5.09(3) of the GST Regulations lists a number of interests for the purpose of subregulation 40-5.09(1). Item 6 within the table is of relevance. It states:

Life insurance business to which subsection 9(1) of the Life Insurance Act 1995, or a declaration under subsection 12(2) or section 12A of that Act, applies, or related reinsurance business

Accordingly, subject to the conditions in subregulation 40-5.09(1) of the GST Regulations being met, supplies made in relation to life insurance are financial supplies.

As the life insurance policies are provided by insurers located in another country, supplies of insurance would not be made by a life insurance business to which the Life Insurance Act applies. Therefore, the supplies of the interests in the policies made by the supplier are not covered by item 6 in subregulation 40-5.09(3) of the GST Regulations.

However, item 2 in the table in subregulation 40-5.09(3) of the GST Regulations provides that the provision, acquisition or disposal of an interest in or under a debt may be a financial supply.

Paragraph 20 of Goods and Services Tax Ruling, Goods and services tax: assignment of payment streams including under a typical securitisation arrangement (GSTR 2004/4) states:

20. Regulation 40-5.02 provides that an interest in relation to a financial supply is anything that is recognised at law or in equity as property in any form. Relevant examples of an interest include a debt or right to credit and a right to future property. The term interest is therefore given its broadest meaning so that an interest is as wide as the legal and equitable concept of property, including rights under a contract.

Paragraphs 23 and 24 of GSTR 2004/4 explain that a debt is a 'chose in action' and that the assignment of a debt, for GST purposes, comes within the meaning of 'disposal'. The payments payable by the insurers upon the death of an insured are payment streams. This is distinguished from the underlying property interests which are the insurance policies. Although the payments are not payable until a future date, paragraphs 29 and 30 of GSTR 2004/4 explain that the assignment of a future payment stream is still the supply of an interest in a debt:

29. Until such time as the right has crystallised, the interest of an assignee of future property for valuable consideration is more than merely contractual. Equity regards the assignee as having a prospective interest in the property to be acquired which has some of the incidents of a proprietary right. It is an interest for the purposes of the GST regulations which includes rights under a contract.

30. Provided there has been an effective legal or equitable assignment of a right to all or part of a payment stream, or an agreement to assign the right to a payment stream that arises in the future there will be the supply of an interest in or under a debt. This is a financial supply under item 2 of subregulation 40-5.09(3) provided the requirements of subregulation 40-5.09(1) are also satisfied.

The sale agreement provides that the entity will purchase from the supplier all of its interests with respect to each of the specified policies. This is an effective assignment of the payment stream arising from the underlying life insurance policies.

The consideration for the sale acquisition of the interests in the life policies is money calculated under the sale agreement with reference to the value of the policies and other associated contracts. Goods and Services Tax Ruling, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) explains that the consideration for the acquisition-supply is the consideration provided for the supply.

35. Consideration for a financial interest is something given for the provision, acquisition or disposal of the financial interest. Part of what is given as consideration may include promises made, or rights granted, under a contract. In the context of financial supplies, the payment received is consideration for the provision or disposal of the financial interest and the payment made is consideration for the acquisition of the financial interest. Where consideration is given for the 'first' supply, there is no need to identify consideration specific to the acquisition-supply (the 'second' supply), as the acquisition will have been made for consideration. Where the financial supply has been made 'for consideration', the acquisition-supply will also be 'for consideration'.

The acquisition of the interests in the life policies is made in the course of the enterprise carried on by the entity and the assignment of the payment streams occurred within Australia and is therefore, connected with Australia. Therefore, the entity is making an acquisition-supply of the payment streams which arise from the interests in the life policies under the sale agreement that is a financial supply.

GST-Free

Subsection 9-30(3) of the GST Act provides that a supply that would be both input taxed and GST-free is GST-free. Therefore, despite that a supply may be a financial supply, which is ordinarily input taxed under section 40-5 of the GST Act the same supply would be GST free if it meets the requirements of Division 38 of the GST Act.

A supply that is 'made in relation to rights' is GST-free under item 4, paragraph (a) in the table in subsection 38-190(1) of the GST Act if the rights are 'for use outside of Australia'.

The sale agreement provides that the supplier will sell, assign, transfer and grant to the entity all of the supplier's Interests with respect to each of the life policies. The contract is worded to ensure that any and all rights available to the supplier under the policies is transferred to the entity.

Concurrently with the sale of the interests in the life policies, the sale agreement provides that the supplier will also instruct the custodian to transfer the life policies to the entity's account.

The specific rights that attach to the life policies generally consist of:

· a right to receive a payment upon the death of the insured (ie death benefit);

· a right to 'security entitlement' in 'financial assets' comprising each policy and proceeds thereof;

· a right to obtain death certificates;

· a right to release policy information;

· a right to name a new beneficiary; and

· any other claims, options, privileges, rights, title and interest in, to and under each policy.

Even though the entity acquires a bundle of rights, the substance of what is acquired is the right to receive proceeds on maturity of a life policy. That is, the right to receive payment of the death benefit is the dominant part and essence of the right. All other rights are integral, ancillary or incidental to this dominant part. These other rights do not have an aim in themselves and they merely aid in the process of receiving the proceeds on maturity of a life policy.

The subject of the sale agreement is the sale, transfer, assignment and grant of the entitlement to receive the death benefit payment payable to the beneficiary under the life policies. Paragraph 65 of Goods and Services Tax Ruling, Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2) (GSTR 2003/8) explains that a supply is 'made in relation to rights' where the 'essential character or substance of the supply, or the dominant part of a composite supply, is one of rights'.

Therefore, the supply made under the sale agreement is made in relation to rights for the purposes of item 4, paragraph (a) in the table in subsection 38-190(1) of the GST Act. However, the supply is GST-free under section 38-190 of the GST Act only if the rights are 'for use outside of Australia'.

Paragraph 108A of GSTR 2003/8 explains that 'it is the intended use of those rights that determines if the supply that is made in relation to the rights falls within item 4'. By purchasing the interests in the life policies under the sale agreement, the entity becomes entitled to receive the proceeds of the policies upon their maturity. The intended use by the entity of the rights it acquires under the sale agreement may be described as 'to receive the future payments of the death benefits under the life policies'.

ATO Interpretative Decision, Goods and Services Tax: GST and brokerage services for foreign shares listed overseas (ATO ID 2012/1) discusses the rights attached to shares and whether those rights are 'for use outside of Australia' in the context of determining whether the supply of the brokerage services provided to facilitate the purchase of the shares is GST-free under item 4 in the table in subsection 38-190(1) of the GST Act. In that context, if the shares are in a company that is incorporated outside of Australia and the shares are listed on a stock exchange outside of Australia, then the rights attached to the shares are for use outside of Australia, even if the shareholder is located within Australia. This principles used in ATO ID 2012/1 to form that view include the principle that the rights are not enforceable in Australia (or that an Australian court is unlikely to claim jurisdiction). This is because, in the context of exchanges located within the United States of America, the shares are required to be physically held in the USA (by a securities intermediary if the shareholder is not located in the USA).

The life policies from which the rights are derived in the case, are policies offered by insurers located in another country and provided over residents of that country. Upon maturity, the insurers pay the death benefit to the custodian which is also located in that country. The insurers and policies are governed by relevant laws of that country and any dispute in relation to enforcement of the rights inherent in the relevant life policies would need to be raised through the relevant court system in that country.

Therefore, the rights attached to the life policies that are the subject of the sale agreement are 'for use outside of Australia' and the entity only receives the funds arising from the death benefits when they have been paid to its custodian in the other country.

Consequently, the supply made by the supplier to the entity under the sale agreement is made 'in relation to rights that are for use outside of Australia' and is GST-free under item 4, paragraph (a) of the table in subsection 38-190(1) of the GST Act.

Question 2

Summary

The proceeds received by the entity upon maturity of a life policy are not consideration for a supply made by the entity.

Detailed reasoning

Section 9-5 of the GST Act states:

You make a taxable supply if:

you make the supply for *consideration; and

the supply is made in the course or furtherance of an *enterprise that you *carry on; and

the supply is *connected with Australia; and

you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(Items marked with an asterisk (*) are defined in the Dictionary at section 195-1 of the GST Act).

The meaning of supply, as defined by section 9-10 of the GST Act includes 'release from an obligation to do anything'. Upon maturity of a life policy, the insurer pays the death benefit to the beneficiary. If that payment is consideration for a supply made by the entity, it will be a taxable supply (unless it is a GST-free or input taxed supply).

Goods and Services Tax Ruling: Goods and services tax: supplies (GSTR 2006/9) provides a detailed analysis of the meaning of 'supply'. In relation to Shaw v. Director of Housing and State of Tasmania (No. 2) 2001 ATC 4054 Paragraph 75 of GSTR 2006/9 states:

75. His Honour did not find a supply in relation to the release of the obligation to pay a judgment sum because the release occurred upon payment and not as a result of the judgment creditor doing something…

It appears that the entity not make a supply when it receives an amount payable under a life policy.

Even if the entity made a supply, that supply would be GST-free under item 2 of the table in subsection 38-190(1) of the GST Act which provides that a supply made to a non-resident who is not in Australia when the thing supplied is done, and the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia is GST-free.

Consequently, the entity does not make a taxable supply when it receives the proceeds of the life policy upon maturity.

Question 3

omitted

Question 4

omitted

Question 5

omitted

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