Edited version of your written advice

Authorisation Number: 1013038606680

Date of advice: 7 July 2016

Ruling

Subject: Income Tax Treatment of Redemption of Investment Policy

Question 1

Will an uplift bonus paid on the redemption of an investment policy represent an assessable contribution made to the trustee of a superannuation fund (the taxpayer), for the purposes of section 295-160 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the uplift bonus paid on the redemption of an investment policy be included in the taxpayer's assessable income, pursuant to section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 3

Will any capital gains or losses arising from the redemption of an investment policy by the taxpayer be disregarded under section 118-300 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

Background

1. The taxpayer is the trustee of a complying superannuation fund.

2. The taxpayer, as trustee of a complying superannuation fund is a policy holder of an Investment Company and holds an investment policy.

3. The policy is notionally unitised for the purpose of ascribing value - there is no legal or beneficial interest in these 'units'.

4. The underlying assets which support the policy are held in the Investment Company's Statutory Fund.

5. The policy owner is a complying superannuation fund, in accordance with the Superannuation Industry (Supervision) Act 1993.

6. The investment policy is an eligible policy for the purposes of section 26AH of the ITAA 1936.

7. The investment policy is a life insurance policy as defined in section 995-1 of the ITAA 1997.

8. The investment policy provides that the taxpayer, may at any time in writing, request payment of the value of some or all of the units allocated to the policy. In turn, the Investment Company is able to terminate the policy at any time by giving written notice of the termination to the taxpayer.

9. The taxpayer is asked by the Investment Company to effect redemption of the policy, and to also consider investing directly in the underlying investments held within the investment policy.

10. The investment is redeemed.

11. The taxpayer pays death benefits upon the death of a member as per the Trust Deed.

Uplift Bonus

12. The taxpayer is advised that, in recognising the difficulties and the financial detriment that it will suffer as a result of the early policy termination, the Investment Company will:

a. enhance the redemption value of the investment policy; and

b. reimburse certain expenses associated with the investment re-arrangement.

13. The taxpayer is advised that, the Investment Company decides to increase the redemption value of the investment policy in accordance with a percentage based uplift.

14. The payment to be made by the Investment Company is designed to compensate for the potential loss of income that might otherwise be earned if the payment of CGT had not been brought forward as a consequence of the redemption of the policy held by the taxpayer.

15. The Investment Company bases the payment on two key assumptions:

a. The timeframe that the tax payment is brought forward by; and

b. The return that it would have earned had it been invested.

16. These amounts are paid into the assets of the Investment Company's Statutory Fund, the subject of the investment policy, pursuant to the terms of an arm's length contractual arrangement between the policy issuer and the taxpayer.

17. This ruling is in respect of this enhanced redemption value of the investment policy, and these payments are considered to be reversionary bonuses.

Relevant legislative provisions

Income Tax Assessment Act 1936 26AH,

Income Tax Assessment Act 1997 118-300 and

Income Tax Assessment Act 1997 295-160.

Reasons for decision

Question 1

Will an uplift bonus paid on the redemption of an investment policy represent an assessable contribution made to the trustee of a superannuation fund (the taxpayer), for the purposes of section 295-160 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

No. The uplift bonus paid on the redemption of the investment policy does not represent an assessable contribution made to the taxpayer as trustee of a superannuation fund, for the purposes of section 295-160 of the ITAA 1997.

Detailed reasoning

For the purposes of Question 1 all legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Section 295-160 stipulates that the assessable income of an entity includes contributions or payments as set out in the table for the income year in which the contributions are received.

Item 1 of the table in section 295-160 stipulates that assessable income of a complying superannuation fund includes a contribution to provide superannuation benefits for someone else (except a contribution that is a roll over superannuation benefit).

Taxation Ruling TR 2010/1 (TR 2010/1) outlines the Commissioner's view about what amounts constitute contributions made to a superannuation fund.

Paragraph 4 of TR 2010/1 provides the ordinary meaning of contribution, which, in the superannuation context, is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund, or all of the members in general.

Paragraphs 6 to 9 of TR 2010/1 stipulate the need to determine a person's purpose in making the contribution. Paragraph 8 in particular says that:

A person will not normally have a purpose of benefiting a member of the fund if the transaction they carry out is in no way dependent upon the identity of the other party as a superannuation provider or they are simply fulfilling the terms of a contract or arrangement entered into on a commercial or arm's length basis.

Based on the facts, the Investment Company enhances the redemption value of the investment policy because of the difficulties and financial detriment that the taxpayer will suffer as a result of the early policy termination. As such, the Investment Company decides to increase the redemption value of the policy in accordance with the uplift bonus.

The enhanced redemption value of the policy and payment is designed to compensate the taxpayer in respect of CGT timing differences and to compensate for the potential loss of income that might otherwise be earned if the payment of CGT is not brought forward as a consequence of redemption of the investment policy.

The amounts are paid into the assets of the Investment Company's Statutory Fund pursuant to the terms of an arm's length contractual arrangement between the Investment Company, as policy issuer, and the taxpayer, as the policy holder.

The uplift bonus to be paid on the redemption of the investment policy is designed to compensate the taxpayer. Additionally, the uplift bonus is not dependent upon the identity of the superannuation fund as a superannuation fund. Therefore, the uplift bonus is not to be paid for the purpose of benefitting one or more particular members of the fund, or all of the members in general.

Accordingly, the uplift bonus to be paid on the investment policy will not represent an assessable contribution made to the taxpayer for the purposes of section 295-160.

Question 2

Will the uplift bonus paid on the redemption of an investment policy be included in the taxpayer's assessable income, pursuant to section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

No. The uplift bonus paid on the redemption of an investment policy, will not be included in the taxpayer's assessable income pursuant to section 26AH of the ITAA 1936.

Detailed reasoning

For the purposes of Question 2 all legislative references are to the Income Tax Assessment Act 1936 unless otherwise specified.

Subsection 26AH(6) provides that a taxpayer's assessable income shall include bonuses, and some other amounts in the nature of bonuses, received under an eligible policy during a specified period (being the 'eligible period').

An 'eligible policy' is a life assurance policy in relation to which the date of commencement of risk is after 27 August 1982, other than a funeral policy (as defined in the ITAA 1997) issued on or after 1 January 2003: 26AH(1) of the ITAA 1936. An 'eligible period' in relation to an eligible policy means the period of 10 years commencing on the date of commencement of risk of the policy: 26AH(1) of the ITAA 1936.

Section 26AH does not require that an amount is actually paid to the policyholder. Subsection 26AH(4) provides that a taxpayer shall be taken to have received an amount under or in relation to an eligible policy although the amount is not actually paid to the taxpayer but is re-invested or otherwise dealt with on his or her behalf or as he or she directs.

There are, however, exclusions to the application of section 26AH.

Paragraph 4 of Taxation Ruling IT 2346 stipulates that receipts arising from policies that are part of an 'exempt' superannuation fund or scheme are outside the scope of section 26AH. Subparagraph 26AH(7)(b)(i) provides that subsection 26AH(6) does not apply to any amount received by a taxpayer in a year of income under an eligible policy where the eligible policy is held by the trustee of a complying superannuation fund.

As stated above in the facts, the taxpayer holds the investment policy. Under the redemption, the Investment Company enhances the redemption value of the investment policy then effects redemption. This means that the investment policy is to be redeemed and the proceeds of the enhanced redemption value of the investment policy are to be paid out.

On the basis of subsection 26AH(4), and the fact that the investment policy constitutes an 'eligible policy' for which an amount will be received during the eligible period, section 26AH will, prima facie, apply to the redemption of the investment policy.

However, the superannuation fund is a complying superannuation fund. This means that the taxpayer holds the relevant policies as trustee of a complying superannuation fund and by virtue of subparagraph 26AH(7)(b)(i) any receipts arising from such policies are outside the scope of section 26AH.

Accordingly, section 26AH will not operate to include the uplift bonus in the taxpayer's assessable income due to the redemption of the investment policy.

Question 3

Will any capital gains or losses arising from the redemption of an investment policy by the taxpayer be disregarded under section 118-300 of the ITAA 1997?

Summary

Yes. A capital gain arising from the redemption of the investment policy by the taxpayer will be disregarded under section 118-300 of the ITAA 1997.

Detailed reasoning

For the purposes of Question 3 all legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Subdivision 118-D covers CGT exemptions involving insurance and superannuation. Specifically, subsection 118-300(1) provides that a capital gain or loss made by a taxpayer from a CGT event happening in relation to a CGT asset that is the taxpayer's interest in rights under (amongst other things) a life insurance policy is disregarded in the situations set out in the table in subsection 118-300(1). Subsection 118-300(2) sets out the CGT events that are relevant for the purposes of the application of subsection 118-300(1).

The table included in subsection 118-300(1) sets out the situations in which a capital gain or capital loss is disregarded. Item 5 of this table stipulates that where the CGT event happens in regards to a policy of insurance on the life of an individual or an annuity instrument, and you are the trustee of a complying superannuation entity for the income year in which the CGT event happened, then the capital gain or capital loss is disregarded.

The redemption of the investment policy involves circumstances where the taxpayer is a trustee of a complying superannuation entity for the income year in which a CGT event happened. Item 5 of subsection 118-300(1) also requires that the CGT event happens to a policy of insurance on the life of an individual. The taxpayer's CGT event happens to a policy on the life of an individual.

Taxation Determination TD 2007/4 (TD 2007/4) stipulates that the expression, 'policy of insurance on the life of an individual' in section 118-300 includes, but is not limited to, life insurance policies within the common law meaning of that term. The expression also includes other life insurance policies as defined in subsection 995-1(1), but only to the extent that those policies provide a sum of money to be paid if an event happens that results in the death of an individual (paragraph 1 of TD 2007/4).

Under the redemption, the Investment Company enhances the redemption value of the policy which is then to be redeemed by the taxpayer. When the investment policy is redeemed, this will give rise to CGT event C2 occurring. CGT event C2 is a relevant event for the purposes of section 118-300: Subsection 118-300(2) of the ITAA 1997.

Based on the facts, the superannuation fund is a complying superannuation entity for the income year in which the CGT event happens. The investment policy is also a life insurance policy as defined in section 995-1. The investment policy does not stipulate that a sum of money is to be paid if an event happens that results in the death of an individual, however, this will not preclude Section 118-300 being applicable.

The taxpayer pays death benefits to its eligible members as per the Trust Deed. The taxpayer may require the redemption of some or all of the units allocated to the investment policy to pay any death benefit that may be needed should the circumstances arise. Therefore the overall arrangement of the taxpayer investing in the investment policy is considered to be a "policy on the life of an individual" for the purposes of Section 118-300.

Accordingly, section 118-300 will apply to disregard any capital gain or loss arising from the redemption of the investment policy

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