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Edited version of your written advice

Authorisation Number: 1051422211595

Date of advice: 11 September 2018

Ruling

Subject: Funeral policy

Question

Will the policy (the Policy) to be issued by an entity (the Entity) be considered a ‘funeral policy’ as the term is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

XXXX to XXXX

The scheme commences on:

XXXX

Relevant facts and circumstances

The Entity is a registered friendly society under the Life Insurance Act 1995 (Life Act).

The operations of the Entity are governed by its Constitution (the Constitution), the Corporations Act 2001 and the Life Act.

The life insurance business of the Entity includes the issuing and administration of funeral policies. The contractual terms and conditions of funeral policies entered into with the relevant policyholders are set out in the approved benefit fund rules of each funeral policy benefit fund of the Entity. These rules form part of the Constitution, which stipulates the rights and powers of the Entity.

The Policy

The Entity proposes to issue the Policy, which is a type of life policy, from one of its benefit funds established under the Constitution. The policyholder becomes a member of the relevant benefit fund when their application for the Policy is accepted by the Entity. The Policy is designed for the policyholder to save for future funeral expenses.

The Policy can be commenced by making a single lump sum contribution or with a regular instalment plan.

The policyholder cannot withdraw any money from the Policy prior to death, other than during the initial free-look period allowed under law.

The benefit under the Policy becomes payable on death only and must be used to meet the cost of the funeral expenses of the life insured. Other than where the Policy has been assigned, as referred to below, the policyholder will be the life insured.

The benefit under the Policy will be paid to the policyholder’s funeral director, or the legal representative of the policyholder’s estate, after the prescribed claim form and necessary supporting documentation, as evidence of the death of the policyholder, has been provided to the Entity.

If the policyholder invests in conjunction with a pre-paid funeral, the Entity will pay the benefit directly to the chosen funeral director.

If the policyholder enters into a pre-paid funeral contract with a funeral director, the policyholder may nominate or assign the Policy to a funeral director or to an approved trustee. The approved trustee, being the Entity, will hold monies pursuant to a pre-paid funeral contract for payment to the funeral director in accordance with the pre-paid funeral contract.

Where the policyholder assigns their interest in the Policy to a funeral director or trustee, the policyholder passes the benefit fund entitlement and the Policy to the assignee. The benefit fund membership rights and benefit entitlement cannot be assigned to any other person.

An optional feature of the Policy is a transportation insurance, which allows the policyholder to cover the cost of transportation from the place of death to the funeral home of the funeral director for an additional one-off premium.

Funeral expenses covered by the Policy

The benefit payable under the Policy must be used to pay funeral expenses of the policyholder.

The funeral expenses are those amounts of money spent directly in connection with the funeral, burial or cremation of the life insured that are both in their nature and timing close to the disposition of the remains of the life insured, including:

The following bereavement expenses, whether immediate or on-going, do not form part of the funeral expenses that the benefit payable under the Policy can be used to pay for:

Relevant legislative provision

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Under subsection 995-1(1) of the ITAA 1997, the definition of ‘funeral policy’ is

Relevantly, a ‘friendly society’ is defined in subsection 995-1(1) of the ITAA 1997 to mean:

The Entity is a registered friendly society under the Life Act.

There is no definition of the word ‘funeral’ or the term ‘benefits to pay for the funeral’ in the ITAA 1997 or in the Income Tax Assessment Act 1936.

Therefore, the word ‘funeral’ and term ‘benefits to pay for the funeral’ must be interpreted in accordance with their ordinary meaning having regard to the context in which they are used.

The word ‘funeral’, as reproduced below, is defined in following dictionaries.

However, the question of what the word ‘funeral’ means and what expenses relate to a funeral has been considered in a number of non-tax law cases as discussed below.

In Public Trustee v. Bednarczyk and Kijas (1959) SASR 178 Mayo J stated at 180 the following in relation to the meaning of the word ‘funeral’:

In Watanabe v. Carbone (1997) 18 SR (WA) 131, Barlow DCJ noted at 132 and at 136 respectively that:

Accordingly, in order for an expense to be a funeral expense there must be a sufficient connection between the expense and the disposal of human remains, including accompanying rites and ceremonies.

In Ryan v. Anaru (2010) WADC 100 (Ryan), Stone DCJ considered whether the cost of a funeral meal at a wake for 200 funeral guests and friends of the deceased was a funeral expense. The funeral meal was part of the Irish tradition and custom and was held after the requiem mass and funeral. A claim was made in relation to the funeral meal under subsection 5(1) of the Fatal Accidents Act 1959 (WA) to recover ‘funeral expenses’ of the deceased person.

Stone DCJ held that the cost of the funeral meal or wake was not a funeral expense as the funeral meal was not part of the accompanying rites and ceremonies of the burial process and was not ‘reasonably necessary to enable the deceased to be properly and appropriately buried and in that sense it was unconnected with her burial’. Accordingly, while it was expected under Irish custom that there would be a funeral meal or wake after the funeral, the wake was not considered to be closely enough connected to the burial for its cost to be treated as a ‘funeral expense’.

Ryan also considered the question of whether the travel costs of relatives who travelled to the home town of the deceased’s mother in order to provide support and assistance with arranging the funeral could be funeral expenses for the purposes of the Fatal Accidents Act 1959 (WA). Stone DCJ held that the travel expenses of these family members was not ‘reasonably necessary’ in order for the deceased’s mother to arrange the funeral, notwithstanding that the relatives provided assistance and emotional support to the deceased’s mother.

The question of whether an expense is a funeral expense must therefore be considered after taking into account all the particular facts of the situation, and for an expense to be a funeral expense the expense must be reasonably connected with the disposal of the remains of the deceased.

Expenses for the cost of a wake and on-going mourning or other cultural events that occur after the funeral would not be expenses that directly relate to the disposal of the human remains or the rites and ceremonies that are part of the disposal and therefore would not be funeral expenses. Similarly, travel expenses for funeral guests would not be funeral expenses. Under the Policy a benefit will not be paid for these types of expenses.

The funeral expenses for which the benefit payable under the Policy can be used to pay are all expenses that directly relate to the disposal of the human remains and the associated rites and ceremonies that would be a reasonable part of that process. They are also in line with the funeral expenses outlined in several ATO IDs issued in relation to funeral policies (for example, ATO ID 2003/481 Friendly Society Funeral Policy - change in funeral arrangements from burial to cremation). Accordingly, a benefit payable under the Policy can only be provided for the sole purpose of paying for the funeral of the policyholder.

Therefore, the Policy to be issued by the Entity will be a ‘funeral policy’ as the term is defined in subsection 995-1(1) of the ITAA 1997.


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