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Edited version of your written advice
Authorisation Number: 1051280140319
Date of advice: 12 September 2017
Ruling
Subject: life insurance policy
Question 1
Is the lump sum payment you received from a surrendered foreign life insurance policy assessable income?
Answer
No
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You joined a life insurance policy in Foreign Country X.
You are the original beneficial owner.
You became an Australian resident for taxation purposes.
You cancelled your insurance.
You received a lump sum payment which was deposited into your own personal bank account in Foreign Country X.
The premiums covered sickness, permanent incapacity, hospital benefit, disability cover and critical illness cover.
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 6-15
Income Tax Assessment Act 1997 section 15-75
Income Tax Assessment Act 1936 section 26AH
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 section 118-300
Reasons for decision
Under section 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) the assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia.
Under subsection 6-5(1) of the ITAA 1997 ordinary income is income according to ordinary concepts.
Section 6-10 of the ITAA 1997 states statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law.
Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income.
Taxation Ruling IT 2504 Income tax: deducibility of interest on borrowed funds – life assurance policies discusses life assurance policies, and states that bonuses received on a policy of life insurance are not income according to ordinary concepts and therefore are not assessable income under section 6-5 of the ITAA 1997.
Section 15-75 of the ITAA 1997 provides that a taxpayer’s assessable income includes any amount received as a bonus, other than a reversionary bonus, on a life insurance policy.
A reversionary bonus is one paid on maturity, forfeiture or surrender of a life insurance policy. A reversionary bonus accumulates within the policy and is to be contrasted with a bonus which is payable annually.
Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in assessable income certain reversionary bonuses received in respect of life insurance policies where the date of commencement is after 27 August 1982.
Section 102-20 of the ITAA 1997 provides that a taxpayer makes a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset.
A life assurance policy is a CGT asset for the purposes of the CGT provisions. Under section 118-300 of the ITAA 1997 any capital gain or loss is disregard if the taxpayer is the original beneficial owner of the policy.
Application to your circumstances
You received a payment or bonus on the surrender of your life insurance policy and your policy commenced after 27 August 1982, therefore section 26AH of the ITAA 1936 applies. However, as your bonus was received more than 10 years from the date of commencement of risk, it is not assessable.
You are the original beneficial owner of the policy and are entitled to disregard (and not include in your assessable income) any assessable gain or loss made from the termination of the policy.
Accordingly, the lump sum payment you received from a surrendered foreign life insurance policy is not assessable income.
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