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This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012730982679

Ruling

Subject: Assessability of life insurance proceeds

Question 1

Are any of the insurance proceeds from a Life Insurance Policy, assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

If the answer to question 1 is no, will the realisation of the policy result in a capital gain?

Answer

Yes

Question 3

If the answer to question 2 is yes, will the capital gains tax (CGT) exemption in section 118-300 of the ITAA 1997 apply to that capital gain?

Answer

Yes

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The taxpayer stated the facts as:

Assumption(s)

Relevant legislative provisions

Section 6-5 of the ITAA 1997

Section 104-25 of the ITAA 1997

Section 118-300 of the ITAA 1997

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The payments from the Insurance Company are not assessable to that company under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes the ordinary income derived directly or indirectly from all sources.

The question of whether life insurance proceeds are of an income or capital nature has been the subject of judicial deliberation over the years. In Marac Life Assurance v Commissioner of Taxation [1986] 1NZLR 694, the Court of Appeal concluded that it was common ground that traditionally proceeds of life insurance policies had been treated as capital. That decision was applied by the Federal Court in NM Superannuation Pty Ltd v Young & Anor (1993) 41 FCR 182; 7 ANZ Insurance Cases 61-163.

Life insurance proceeds are not income according to ordinary concepts under section 6-5 of the ITAA 1997.

Question 2

Summary

The payment of life insurance proceeds gives rise to CGT event C2.

Detailed reasoning

Where a life insurance policy is paid out as a lump sum, this involves a satisfaction of the holder's rights under the policy. This gives rise to CGT event C2 pursuant to section 104-25 of the ITAA 1997.

Question 3

Summary

The proceeds of the life insurance policy are not assessable.

Detailed reasoning

Taxation Ruling No IT 155: Key Man Insurance - Assessability of proceeds and deductibility of premiums states:

In this case, the Insurance policy had plan benefits of Total and Permanent Disability and Life Care (Death Cover). The policy owner is listed as the company. The ruling application states the policy was held by the trustee company in its capacity as trustee of the trust and the trustee company paid the premiums. The individual was a director of the trustee company.

The payments were paid as life insurance on the individual and thus are not assessable in accordance with IT 155.


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