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Edited version of your private ruling
Authorisation Number: 1012593425122
Ruling
Subject: Assessability of foreign life policy income
Questions and answers
1. Upon becoming a resident of Australia for taxation purposes, will any amount that accrues annually in a foreign whole of life insurance policy and results in a change in yearly increase in value of that policy between year ends be included in your assessable income in Australia?
No.
2. Will any reversionary bonuses paid on surrendering or otherwise ending the policy be included in your assessable income?
No.
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2024
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
You are currently not a resident of Australia for tax purposes.
You will become a resident of Australia for tax purposes when you return to Australia to live on 1 July 2014.
You will invest in a foreign whole of life assurance policy (the policy) before you return to Australia.
The policy will be issued by a non-resident insurer through a specific scheme.
You have provided copies of relevant publications from the insurer.
These documents indicate that:
· An initial investment equivalent of a specified sum is required
· You can make additional investments of a specified sum or more at any time
· You can have up to 10 persons listed as lives assured under the policy
· A death benefit is payable on the death of the last surviving person assured
· You can cash the policy in at any time
· You can choose to make periodic or ad hoc withdrawals from your investment in the scheme for the life of the policy
You have stated that:
· You will be the owner of the policy
· You will be the sole insured person under the policy
· Either you or your estate will be the beneficiary of the policy
· You will not cash in the policy within 10 years of the date of commencement of risk as defined in subsection 26AH(1) of the Income Tax Assessment Act 1936 (ITAA 1936)
· You will pay one single premium up front of a specified sum and no further premiums over the next 10 years
The fund rules indicate that:
· A 'policy fund' is created under the scheme
· Units are notionally allocated to the 'policy fund' for the sole purposes of determining the benefits payable to you under the policy
· The value of the units in the 'policy fund' is directly linked to the performance of your investment in the scheme
· You have the ability to choose to have the capital you invest in the scheme invested in one or more of three separate investment options
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 102-20.
Income Tax Assessment Act 1997 Section 108-5.
Income Tax Assessment Act 1997 Section 118-300.
Income Tax Assessment Act 1936 Section 26AH.
Reasons for decision
Assessability of amounts that accrue in foreign life policy
Section 6-5 of the ITAA 1997 states that assessable income consists of both ordinary income and statutory income. However, an amount of ordinary or statutory income will not be assessable income if the amount is made exempt or is otherwise excluded from assessable income. In working out whether you have derived an amount of ordinary income, and if so when you derived it, section 6-5 of the ITAA 1997 states that you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
In your case, you will invest in a foreign life policy. The amounts that accrue annually in your foreign life policy result in changes in the value of the policy.
As the amounts that accrue are not received by you or dealt with on your behalf, you have not actually received these amounts as income. Therefore, the amounts that accrue annually in your foreign life policy are not assessable as ordinary income in Australia.
Furthermore, there are no provisions in the capital gains tax legislation that would operate to include these amounts as assessable capital gains.
Therefore, the amounts that accrue annually in your foreign life policy are not assessable as ordinary or statutory income in Australia.
Assessability of reversionary bonuses
Section 6-5 of the ITAA 1997 states that assessable income consists of both ordinary income and statutory income. However, an amount of ordinary or statutory income will not be assessable income if the amount is made exempt or is otherwise excluded from assessable income.
The proceeds received from the maturity of your foreign life policy are classed as a reversionary bonus. A reversionary bonus paid under a short term life policy on maturity, forfeiture or surrendered taken out after 28 August 1982 is subject to special tax treatment if the risk commenced after 7 December 1983 under section 26AH of the ITAA 1936. Subsection 26AH(2) of the ITAA 1936 states that if a reversionary bonus is received after 10 years from commencement of a life insurance policy, that the bonus received is not assessable. Subsection 26AH(13) of the ITAA 1936 states that the 10 year period is reset if the premiums in one year exceed the premiums in the previous year by more than 25%.
In your case, your foreign life policy will be taken out after 28 August 1982 and will be held for more than 10 years, and you will only pay one premium up front. Therefore, the conditions of section 26AH of the ITAAA 1936 have been met and the reversionary bonus received from the maturity of the policy is not assessable income.
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