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Edited version of your written advice
Authorisation Number: 1013072515324
Date of advice: 25 August 2016
Ruling
Subject: Residency for tax purposes
Questions and answers
1. If you become a resident of Australia for tax purposes, will any amounts that have accrued in you foreign life assurance plan be treated as assessable if you cash in the policy after 10 years (from policy commencement) or after full maturity of the plan (20 years)?
No.
2. If you become a resident of Australia for tax purposes, will any scheme bonuses which accrue in you foreign life assurance plan be treated as assessable income if you surrender or end the policy after 10 years (from policy commencement) or after full maturity of the plan (20 years)?
No.
This ruling applies for the following periods
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
The scheme commenced on
1 July 2016
Relevant facts and circumstances
You are currently a non-resident for Australia for tax purposes but you may return to Australia as a tax resident.
You and your family (a spouse and child) are living in a foreign country for an undetermined period. You we are planning to stay for a long time. You have signed a long term lease.
You are applying for a foreign life assurance plan. The plan you are considering is called X, a unit linked regular premium investment plan issued by a non-resident insurer.
You have provided a copy of the product summary from the non-resident insurer.
The policy is not likely to commence until 2018.
You will be the owner of the policy.
Only your life will be assured under the policy.
A death benefit is payable to your estate or nominated beneficiary (this will be your spouse).
You will be paying monthly premiums of $X.
The plan payment term will be 20 years.
The scheme allows for ad hoc withdrawals but you do not intend to cash in or surrender the plan prior to completing all payments. However, you may have to consider this if extenuating circumstances arise but this will not be within 10 years of commencement of the policy.
You have the ability to choose to have the capital you invest in the scheme in one or more of up to several investment options.
The scheme allows for premium increases. However, you do not intend to increase annual premium payments by more than 15% in any calendar year.
The scheme can accommodate premium reductions after the first 18 months however. If you do so in the first five years you will be subject to additional fees.
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 assurance policy. The amounts that accrue annually in your 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 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 assurance policy are classed as a bonus. A 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 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 pay $X premium per month and any premium increase will not exceed 25%. Therefore, the conditions of section 26AH of the ITAAA 1936 have been met and the bonus received from the maturity of the policy is not assessable income.
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