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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012612075377

Ruling

Subject: Assessability of reversionary bonus received from a foreign life policy

Question and answer:

Is any part of the bonus you received from the surrender of a foreign life insurance policy included in your assessable income in Australia?

No

This ruling applies for the following period:

1 July 2013 to 30 June 2014.

The scheme commenced on:

1 July 2013.

Relevant facts and circumstances:

You are an Australian resident taxpayer.

You purchased a foreign life policy (FLP) after 27 August 1982.

You paid a one off premium to acquire the policy.

The date of commencement of risk of the policy was after 7 December 1983.

You were the owner, the life insured person and sole beneficiary of the policy.

You surrendered the policy 20 years after you acquired it which was 10 years after the expiration of the eligible period.

A final bonus was applied to the policy when you surrendered it.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-4

Income Tax Assessment Act 1997 Section 15-75

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 118-300

Income Tax Assessment Act 1936 Section 26AH

Reasons for decision

Assessable income, resident taxpayers and foreign life policies - general

Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a resident taxpayer includes all the ordinary and statutory income they earn from all sources in or out of Australia in an income year.

Amounts of ordinary income are specifically included in a taxpayer's assessable income by the provisions of section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 specifies that an amount that is not ordinary income (and therefore not assessable under the provisions of section 6-5 of the ITAA 1997) will be assessable as an amount of statutory income if the amount is included in a taxpayer's assessable income by another provision of the tax law.

A list of the provisions that include specific amounts in a taxpayer's assessable income is contained in section 10-5 of the ITAA 1997. The list includes a number of provisions relevant to amounts received under a life insurance policy. These are:

Capital gains tax

The CGT provisions are contained in Part 3-1 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. In most cases the CGT asset must have been acquired on or after 20 September 1985 for the CGT provisions to apply to the asset.

A life insurance policy is a CGT asset for the purposes of the CGT provisions, however, section 118-300 of the ITAA 1997 allows you to disregard (and therefore exclude from your assessable income) any assessable gain or loss made from a policy of life insurance if you are the original beneficial owner of the policy.

As you were the original beneficial owner of the policy no amount of any gain or loss you made when you surrendered the policy is included in your assessable income in Australia under the CGT provisions.

Assessability of life insurance policy bonus - sections 6-5 and 15-75 of the ITAA 1997, and 26AH of the ITAA 1936

Bonuses received under a policy of life insurance are not income according to ordinary concepts and are therefore not assessable under the provisions of section 6-5 of the ITAA 1997.

However, and as stated previously, insurance bonuses are potentially assessable to a taxpayer under the provisions of section 15-75 of the ITAA 1997, or section 26AH of the ITAA 1936.

Section 15-75 of the ITAA 1997 provides that:

A bonus received under a life insurance policy is a reversionary bonus when the entitlement to the bonus only accrues upon maturity of the policy and is not payable annually.

You have stated that a final bonus was applied to the policy when you surrendered it. Accordingly, we consider the bonus you received on surrender of the policy to have been a reversionary bonus.

As detailed above, a reversionary bonus is not assessable under the provisions of either section
6-5 or 15-75 of the ITAA 1997, but may be assessable under the provisions of section 26AH of the ITAA 1936.

Section 26AH of the ITAA 1936 - Bonuses and other amounts received in respect of certain short term life assurance policies

Section 26AH of the ITAA 1936 provides that a taxpayer's assessable income includes bonuses and some other amounts in the nature of bonuses that are received under an eligible policy during the eligible period. Where an amount such as a reversionary bonus is received in respect of an eligible policy but is received outside the eligible period of the policy, no amount of that bonus is included in your assessable income by the provisions of section 26AH of the ITAA 1936.

The policy was an eligible policy for the purposes of section 26AH of the ITAA 1936 because the date of commencement of risk was after 27 August 1982.

For eligible policies with a date of commencement of risk after 7 December 1983, the eligible period is the first 10 years of the policy.

You surrendered the policy 10 years after the expiration of the eligible period. Accordingly, no amount of the reversionary bonuses you received in respect of the policy is included in your assessable income in Australia under the provisions of section 26AH of the ITAA 1936.

Conclusion

No amount of the reversionary bonus you received from the surrendered sub-polices is included in your assessable income in Australia.

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