Edited version of private advice

Authorisation Number: 1051590644617

Date of advice: 23 December 2019

Ruling

Subject: Taxation of a foreign life policy

Question

Are you assessable in respect of a reversionary bonus you may receive when a life insurance Policy matures, is forfeited or surrendered after 10 years from commencement of risk?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You have invested in a life assurance policy.

The policy is held overseas and was set up on mid 20XX.

Your spouse and two children are listed as beneficiaries.

The policy is a life assurance policy with the option of withdrawing funds prior to death.

The premium was paid into the account on late 20XX.

You do not intend to pay any further premiums into the account.

You and your family are planning on relocating to Australia in mid 20XX and being residents for taxation purposes from that date onwards.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 25(1)

Income Tax Assessment Act 1936 section 26AH

Income Tax Assessment Act 1997 section 6-10

Reasons for decision

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included:

·        income according to ordinary concepts; that is, ordinary income (section 6-5 of the ITAA 1997), or

·        an amount which is included by a specific provision about assessable income; that is, statutory income (section 6-10 of the ITAA 1997).

Taxation Ruling IT 2504 - income tax: deductibility of interest on borrowed funds - life assurance policies provides the Commissioner's views on bonuses received from life insurance policies. It states at paragraph 2:

Bonuses received on a policy of life assurance are not income according to ordinary concepts and therefore do not constitute assessable income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

In your case, the bonuses will not be ordinary income, they will only be included in your assessable income if it is statutory income.

Section 26AH of the ITAA 1936 includes in assessable income certain bonuses received under short term life insurance policies.

You will receive a final bonus on the cashing out of your policies. The final bonus will be considered to be a reversionary bonus.

Section 26AH of the ITAA 1936 provides for the taxation of certain reversionary bonuses received under a relevant life assurance policy (an eligible policy) during a specified period (the eligible period).

Reversionary bonuses are paid on maturity of the life assurance policy. They can also be paid when policies are partially surrendered. The effect of section 26AH of the ITAA 1936 is that for policies taken out after 27 August 1982, the full reversionary bonus is assessable if it is received in the first eight years, two-thirds of the bonus if received in the ninth year and one-third of the bonus if received in the tenth year.

Reversionary bonuses received more than ten years from the date of commencement of risk do not fall within the operation of section 26AH of the ITAA 1936 and are not included in the assessable income.

Taxation Ruling IT 2346 - income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation discusses the application of section 26AH of the ITAA 1936 to short-term life assurance policies.

Bonuses received under life insurance policies are not assessable under section 26AH of the ITAA 1936 if the policy has been held for a minimum of 4 or 10 years, depending on whether the date of commencement of risk is before or after 27 August 1982.

In the case of a policy for a term of 10 years or more, no liability to taxation arises if the policy holder does not exercise their right to early surrender or forfeiture and therefore allows the policy to run its full term. Therefore, bonus amounts received after the tenth year of the policy are not included on a tax return.

In your case, a bonus received from your policy that is held for more than 10 years is not assessable under section 26AH of the ITAA 1936, and not required to be included in your Australian income tax return.

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