Edited version of your written advice

Authorisation Number: 1051281000445

Date of advice: 11 September 2017

Ruling

Subject: termination of a foreign life policy

Question and answer

Did the disposal of a foreign insurance policy give rise to assessable income attributable to you as a beneficiary of a foreign trust?

No

Is your receipt of units from an insurance policy considered a payment from a foreign trust made to an Australian resident?

No

Is the receipt of an amount from the surrender of a life insurance policy included in your assessable income?

No

This ruling applies for the following period

Financial year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The Trust

More than 10 years ago a settlement deed was executed by your father as the settlor over a trust constituting a policy of life.

The created Trust is a discretionary Trust for the Appointed Class defined by reference to the settlor and their family

Two trustees were appointed

Beneficiaries

The class of beneficiaries was listed in the settlement deed by reference to the settlor, family, last Will and any person appointed under discretion.

More than 10 years ago, interest of possession was appointed in favour of you and your sibling in equal shares/absolutely.

More than 10 years ago, the settlor was irrevocably excluded from the appointed class of beneficiaries.

The Asset

An insurance policy with a commencement date of more than 10 years ago.

The insurance policy is comprised of units

All interest income, dividends and distributions which the insurer receives in respect of any assets comprising the fund shall accrue to, and form part of the fund.

The policy was paid for in one initial instalment.

The Policy

The bond provides for policy encashment value plus 1% with a maximum amount payable of $xx.xx per last life assured.

The policy provides insurance over the 2 lives.

The policy was issued on more than 10 years ago and the units were surrendered in the financial year ended 30 June 20XX

You received $xx.xx on the surrender of the policy.

The policy is an investment account contract or investment-linked contract

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 26AH of the Income Tax Assessment Act 1936

Section 99B of the Income Tax Assessment Act 1936

Reasons for decision

Assessability of amounts that accrue in foreign life policy

Section 6-5 of the Income Tax Assessment Act 1997 (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 are in receipt of a foreign life policy. The amounts that accrued in your foreign life policy resulted from changes in the value of the policy as all interest income, dividends and distributions which the insurer receives in respect of any assets comprising the fund accrued to form part of the fund.

As the amounts that accrued 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 reversionary bonuses

The proceeds received from the maturity of your foreign life policy are classed as a reversionary bonus. A reversionary 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 Income Tax Assessment Act 1936 (ITAA 1936). Subsection 26AH(2) of the ITAA 1936 states that if a reversionary 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%.

Section 26AH of the ITAA 1936 provides that a taxpayer's assessable income shall include bonuses received under an eligible policy during an eligible period. It does not provide for the inclusion of such payments in a taxpayer’s assessable income if they are received outside of an eligible period.

An eligible policy is defined as a life assurance policy for which the date of commencement of risk is after 27 August 1982.

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.

Subsection 26AH (1) defines eligible policy as 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) issues on or after 1 January 2003.

The commencement of risk for your policy is in excess of 10 years. As the policy was paid for in one instalment there are no premium adjustments that need to be considered.

Lump sum payment received by resident beneficiary of a non-resident trust

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents either:

(a) corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer;

(b) amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer;

(c) amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936; or

(d) and amounts included in assessable income under section 102AAZD of the ITAA 1936.

As your reversionary bonus is not ordinary income, the bonus would not be included in your assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

Therefore, paragraph 99B(2)(b) of the ITAA 1936 will apply to exclude the lump sum payment from your assessable income.

Therefore, the lump sum payment you received from a foreign life assurance policy held by a non-resident trust is not included in your assessable income under section 99B of the ITAA 1936.

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