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Edited version of your written advice
Authorisation Number: 1051466555823
Date of advice: 14 January 2019
Ruling
Subject: Assessability of income from bonuses on a foreign life insurance policy.
1. Does the International Bond (the Bond) meet the definition of a life insurance policy as set out in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer:
Yes
2. Does the assignment of the Bond by the foreign trust to you result in you deriving ordinary or statutory income?
Answer:
No
3. Does the assignment of the Additional Bond by your parents to you result in ordinary or statutory income assessable to you?
Answer
No
4. Do the rules for reversionary bonuses on insurance policies under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the Bond and the Additional Bond when redeemed?
Answer:
Yes
5. If the Bond and the Additional Bond are redeemed more than 10 years from when they were issued will any part of the profits receivable on the redemption be assessable income?
Answer
No
6. Will any capital gains or losses arising from the redemption of the foreign life policy be disregarded under section 118-300 of the ITAA 1997?
Answer:
Yes
This ruling applies for the following periods:
Year ended 30 June 2019
Year ended 30 June 2020
Year ended 30 June 2021
The scheme commences on:
26 July 2010
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
● Your parents are residents of an overseas country and have set up a Trust (the Trust) in that country.
● The Trust was established in 20XX.
● Your parents are the trustees of the Trust.
● The Trust was set up with an amount invested in an International Portfolio Bond (the Bond).
● The Bond is made up of a number of individual life insurance policies.
● No funds have been withdrawn from the Bond.
● No additional funds have been added to the Bond.
● The current value of the Bond is approximately of X.
● The Policy assured the lives of X named individuals, including yourself.
● The benefit available under the Policy becomes payable on the death of the last surviving life assured or upon surrender.
● Your parents wish to have the Trust appoint/gift the Bond to you for nil consideration prior to early 2019.
● You will be a resident of Australia for tax purposes when the proposed transactions take place.
● Your parents jointly own in their own name identical bonds to the ones held in trust, but of differing values (the Additional Bond).
● They propose to transfer the Additional Bond to you in the future for nil consideration.
● The Trust has not prepared any financial statements nor lodged any tax returns
● The transfer of the Bond and the Additional Bond do not expose the Trust nor the parents to any tax in their country of residence.
● You are likely to hold the Bond and redeem it after 10 years from the commencement of the investment.
● On surrendering/redeeming the policies a reversionary bonus will be paid.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5,
Income Tax Assessment Act 1997 Section 15-75
Income Tax Assessment Act 1997 Section 104-85
Income Tax Assessment Act 1997 Section 118-300
Income Tax Assessment Act 1997 Section 995-1
Income Tax Assessment Act 1936 Section 26AH
Income Tax Assessment Act 1936 Section 99B
Life Insurance Act 1995 Section 9
Reasons for decision
Summary
The Bond and the Additional Bond are life insurance policies. The assignment of the Bond and the Additional Bond to you will not result in you receiving any assessable income. If you redeem the Bond and the Additional Bond after ten years from the commencement of risk, the proceeds will not be assessable income.
Detailed reasoning
The definition of a life insurance policy in section 995-1of the ITAA 1997 is the same as the expression of a ‘life policy’ in the Life Insurance Act 1995 (LIA). Section 9 of the LIA defines a life policy:
Section 9 Life policy
(1) Subject to subsection (2), each of the following constitutes a life policy for the purposes of this Act:
(a) a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;
(b) a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life;
(c) a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life;
(d) a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the term prescribed by the regulations for the purposes of this paragraph;
(e) a continuous disability policy;
(f) a contract (whether or not it is a contract of insurance) that constitutes an investment account contract;
(g) a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract.
(2) A contract that provides for the payment of money on the death of a person is not a life policy if:
(a) by the terms of the contract, the duration of the contract is to be not more than one year; and
(b) payment is only to be made in the event of:
(i) death by accident; or
(ii) death resulting from a specified sickness.
In the current case, a benefit is payable upon surrender or on the death of the last surviving life assured. The terms of the policy are consistent with subparagraph 9(1)(a) of the LIA - a contract of insurance that provides for the payment of money on the death of a person. As the duration of the policy is longer than one year and payment of the benefit can also be made when the policy is surrendered it is not excluded by subsection 9(2) of the LIA.
The Bond and the Additional Bond meet the definition of a life policy for the purposes of the LIA and therefore the definition of a life insurance policy for the purposes of section 995-1 of the ITAA 1997.
Gifting of the Bond by the Foreign Trust
Assessable income consists of income according to ordinary concepts (ordinary income) and other amounts which are included in assessable income under provisions of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936) (statutory income). Statutory income includes net capital gains. Assessable income does not include exempt income or non-assessable non-exempt income.
Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts (ordinary income). If you are an Australian resident, your assessable income includes the ordinary income you derived from all sources, including those outside of Australia.
As a chose in action the Bond is a capital asset. It is not ordinary income.
Payments of capital may be assessable as statutory income under the capital gains tax (CGT) provisions. Section 102-5 of the ITAA 1997 provides that your assessable income includes your net capital gain for the income year.
CGT event E7 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary to satisfy all or part of the beneficiary's interest in trust capital (section 104-85 of the ITAA 1997). A capital gain or loss made from CGT event E7 by a beneficiary is disregarded if the beneficiary acquired the trust interest for no expenditure (subsection 104-85(6) ITAA 1997).
As you will not pay any amount to acquire the Bond from the Trust, any capital gain or loss you may make is disregarded.
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 99B(1) is not to include any amount that represents either:-
● corpus of the trust. However, 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(paragraph 99B(2)(a) of the ITAA 1936)
● amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer(paragraph 99B(2)(b) of the ITAA 1936), or
● 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 (paragraph 99(2)(c) of the ITAA 1936).
The Trust intends to make a distribution to you by appointing the Bond/policies to you. The Bond constitutes corpus of the Trust and does not include any amounts derived by the Trust. The amount you receive will not be assessable under section 99B of the ITAA 1936.
Gifting of the Additional Bond by your parents
As discussed above, assessable income consists of ordinary income and statutory income. A gift is not assessable as ordinary income or statutory income. If your parents gift the Additional Bond to you the Additional Bond will not constitute your assessable income.
Taxation consequences on redemption of the Bond and the Additional Bond (the bonds)
Reversionary bonus
Section 15-75 of the ITAA 1997 provides that the assessable income of a taxpayer includes any amount received as or by way of a bonus on a life insurance policy, other than a reversionary bonus. A reversionary bonus is one where the entitlement to the bonus only accrues upon the maturity, forfeiture or surrender of the policy and is to be contrasted to an annual bonus.
Section 26AH of the ITAA 1936 covers reversionary bonuses that are not ordinary income. The effect of subsection 26AH(6) of the ITAA 1936 is that, for an eligible policy with risk commencing after 7 December 1983 and redeemed within certain periods the outcome is as follows:
● bonus amount received within the first 8 years the full amount is assessable;
● bonus amount received in the 9th year - two-thirds of the bonus is assessable; and
● bonus amount received in the 10th year - one-third of the bonus is assessable.
● After 10 years the bonus is not assessable.
The operation of section 26AH of the ITAA 1936 is explained in ‘Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation’. The concept of a bonus is that the profit or gain element of the investment of the policy is passed on to the policyholder. Interest derived in respect of an investment account policy is, when paid to the policyholder, regarded as a payment by way of a bonus. Subsection 26AH(9) of the ITAA 1936 is relevant in this regard. Under that subsection, an amount received otherwise than as or by way of a bonus is nevertheless deemed to have been received as or by way of a bonus where the Commissioner considers that the amount represents an existing or reasonably expected future bonus.
You will receive a reversionary bonus on surrendering your foreign life, because the entitlement to the bonus only accrues upon the maturity, forfeiture or surrender of the policy. Therefore the proceeds from surrendering the profits will not be taxable under section 15-75 of the ITAA 1995.
In your case, if the Bond is redeemed more than ten years from their commencement date, the bonus amounts will not be assessable. You have not provided the date on which your parents acquired the Additional Bond, but you have stated that the policies held under the Additional Bond are identical to the Bond. The bonus amounts associated with the policies held under the Additional Bond will be taxable in accordance with section 26AH of the ITAA 1936 if they are disposed of within 10 years of their commencement. If they are redeemed after 10 years from the commencement of risk the profits will not be assessable.
Application of CGT exemption
A lump sum payment received from the termination of a life insurance policy does not constitute ordinary income
Section 118-300 of the ITAA 1997 excludes from the application of the CGT provisions certain capital gains or capital losses relating to a taxpayer's interests under insurance policies, in specified circumstances. Item 4 of subsection 118-300(1) of the ITAA 1997 provides that the capital gain or loss is disregarded where the taxpayer acquired the interest in the life insurance policy or annuity instrument for no consideration.
In your case, you will acquire the Bond and the Additional Bond (and the associated policies) for no consideration. Therefore any capital gain or loss that results from a future CGT event is disregarded under item 4 of subsection 118-300(1) of the ITAA 1997.
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