Edited version of private advice

Authorisation Number: 1052234486701

Date of advice: 26 March 2024

Ruling

Subject:Foreign life insurance policy - reversionary bonus

Question 1

Did the policy meet the requirements of subsection 26AH(2) of the Income Tax Assessment Act 1936 (ITAA 1936) and as such, the bonus received is not assessable?

Answer

No.

Question 2

If the answer to question 1 is no, under subsection 23AH(13) of the ITAA 1936, did the policy reset in 20XX, being the following year in which no premiums were paid?

Answer

Yes.

Question 3

If the answer to question 2 is yes, will the full amount of the reversionary bonus be assessable?

Answer

Yes.

Question 4

Will the Commissioner exercise the discretion contained in section 26AH(8) of the ITAA 1936 to exclude all of part of the bonus received from the policy?

Answer

No.

Question 5

Will the Commissioner form an opinion that it would be unreasonable to include any amount of income received on the surrender of the policy in your assessable income?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

When you were a non-resident, in 200X you invested in a foreign life policy (the policy) with an Overseas Company.

The policy insured your life and nobody else, and you are the original beneficial owner of the policy which is confirmed in the policy schedule.

Following taking out the foreign life policy, you became an Australian resident for taxation purposes.

Over the life of the policy, you and your employer contributed periodic instalments to the policy. In some years the contributions changed because of pension obligations in different employment locations. Due to this there are some years with no contributions.

You have supplied a summary of the annual contributions made to the policy by yourself and your employer since the policy was taken out.

This summary shows that the amount of premiums payable under your policy in relation to the 20XX year exceeded by more than 25% the amount of the premiums payable under the policy in relation to the immediately preceding assurance year (20XX).

Whilst the contributions varied in some years due to the employment location, the premium payable under the policy was always xx per month. Due to the different employment locations, in some years the employer did not make any contributions.

The policy matured in late 20XX.

The estimated amount that will be received when the policy is paid out will be xx in the overseas currency.

Further details about the policy are listed below:

You have an International Savings Plan with an Overseas Company which you took out on in late 20XX, with the effective start date being in late 20XX, and the date that the risk was assumed was shortly after this.

The contribution premium payment term is XX years. The policy renewal date is towards the end of each year.

The contribution premium amount is XX per month until late 20XX inclusive.

The terms and conditions of Policy are set out in Policy Booklet.

Condition X of the terms and conditions indicate that the International Savings Plan includes life insurance where on the death of the life insured, the death benefit will be paid out to the beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 26AH

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Did the policy meet the requirements of subsection 26AH(2) of the Income Tax Assessment Act 1936 (ITAA 1936) and as such, the bonus received is not assessable?

Summary

No.

The full amount of the reversionary bonus you received on the surrender of the policy is fully assessable under section 26AH of the (ITAA 1936).

Question 2

If the answer to question 1 is no, under subsection 23AH(13) of the ITAA 1936, did the policy reset in 20XX, being the following year in which no premiums were paid?

Summary

Yes.

As the amount of premiums payable under your policy in relation to the 20XX year exceeded by more than 25% the amount of the premiums payable under the policy in relation to the immediately preceding assurance year (20XX), the eligible period in relation to the policy will recommence at the date of commencement of the premium increase year of 20XX (see paragraphs 18 and 19 of IT 2346).

Question 3

If the answer to question 2 is yes, will the full amount of the reversionary bonus be assessable?

Answer

Yes.

Detailed reasoning (for questions 1,2 and 3)

Certain bonuses received on surrender or maturity of a life assurance policy (eligible policy) may be included in assessable income under section 26AH of the ITAA 1936.

Reversionary bonuses received during a specified period (the eligible period) may be assessable in particular instances.

Paragraph 5 of Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation (IT 2346) states that section 26AH may apply to amounts received under any form of life assurance policy including those known as unbundled life assurance contracts which may be categorised as either investment account or investment linked policies.

An eligible policy is a policy of life assurance in relation to which the date of commencement of risk is after 27 August 1982.

The date of commencement of risk in relation to an eligible policy is:

•         the date of commencement of the period to which the first or only premium paid under the policy relates; or

•         where the first or only premium does not relate to a particular period, the date of payment of that premium.

For a policy with a date of commencement of risk after 7 December 1983, the eligible period in respect of an eligible policy is the first 10 years.

For eligible policies taken out after 7 December 1983, amounts received as or by way of bonuses are assessable in full if received in the first eight years after the date of commencement of the policy, and as to two-thirds if received in the ninth year, or as to one-third if received in the tenth year after that date.

Application to your circumstances

In your case, your policy is a life assurance policy and is therefore subject to section 26AH of the ITAA 1936.

In addition, under subsection 26AH(13) of the ITAA 1936, where the amount of premiums payable under an eligible policy in relation to an assurance year exceeds by more than 25% the amount of the premiums payable under the policy in relation to the immediately preceding assurance year, the eligible period in relation to the policy will recommence at the date of commencement of the premium increase year (see paragraphs 18 and 19 of IT 2346).

In your case, your policy commenced in 200X, and your employer paid a premium of XX in the 20XX year. However, there were no premiums paid in the preceding assurance year (20XX).

As such, given that the amount of premiums payable under your policy in relation to the 20XX year exceeded by more than 25% the amount of the premiums payable under the policy in relation to the immediately preceding assurance year (20XX), the eligible period in relation to the policy will recommence at the date of commencement of the premium increase year of 20XX under subsection 26AH(13) of the ITAA 1936.

Paragraph 20 of IT 2346 provides that where a policyholder is contractually obligated to make a fixed premium payment, the relevant amount for the purposes of sub-section 26AH(13) is the amount of premium payable in relation to the relevant assurance year. If such a policyholder failed to meet a particular premium payment and in a subsequent assurance year paid the overdue premium together with that subsequent year's premium, the payment is not to be taken to represent an increased premium for the purposes of sub-section 26AH(13).

However, paragraph 20 of IT 2346 will not apply in your case, as from the information provided you did not fail to meet a premium payment then in a subsequent year pay the overdue premium together with that subsequent year's payment.

As such, and in your case, given that the policy matured in late 20XX, and the policy renewal date is towards the end of each year, you are assessable on the entire amount of the reversionary bonus amount received on surrender of the policy as the amount was received within 7 years from the date that the eligible period was reset in 20XX under subsection 26AH(13) of the ITAA 1936.

Question 4

Will the Commissioner exercise the discretion contained in section 26AH(8) of the ITAA 1936 to exclude all of part of the bonus received from the policy?

Summary

The Commissioner will not exercise his discretion to exclude from your assessable income amounts received as reversionary bonuses from your life-assurance policies.

Detailed reasoning

The Commissioner has a discretion in subsection 26AH(8) of the ITAA 1936 to exclude from assessable income the whole or part of an amount received by way of a bonus that would otherwise be assessable under subsection 26AH(6) ITAA 1936. In doing so, the Commissioner is to have regard to:

i) the total amount of premiums paid under the eligible policy;

ii) the total amounts received by the taxpayer or by any other person under the eligible policy and the total amounts of bonuses included in the amounts so received:

iii) the amount of the surrender value of the eligible policy at the time when the forfeiture, surrender or other termination occurred; and

iv) such other matters as the Commissioner considers relevant

Paragraph 10 of Taxation Ruling IT 2346 states that the object of the discretion is to ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the holder or holders of the policy exceeds the premiums paid under the policy.

Subsection 26AH(8) of the ITAA 1936 was introduced to prevent the unintended effect of taxing bonuses where they do not exceed premiums paid for the relevant policy.

In adding the relevant clause to the Bill that introduced the section 26AH changes, Senator Walsh, Commonwealth of Australia, Senate, Official Hansard, Tuesday, 27 March 1984,page 727 stated that:

Where a policyholder terminates a traditional policy at a loss, he or she may have participated in profits, by way of bonuses, and under the Bill be taxable on those profits.

Reflecting the variety of situations that may be encountered, the first amendment will overcome this unintended effect by providing that the Commissioner of Taxation may appropriately exclude from assessable income a part of a bonus which would otherwise fall to be taxed. The Commissioner is to have regard to such matters as total premiums paid on the policy, any amounts or bonuses previously received under the policy and the surrender value of the policy.

In practice this will mean that bonuses will not be subject to tax under the new measures unless the total amount received by the holder or holders of a policy exceeds the premiums paid under the policy.

Application to your circumstances

In your case, the combined total premium amount paid was XX and the estimated amount that will be received when the policy is paid out will be XX. As a result, the total amount you will receive will exceed the premiums paid. As the primary objective of the discretion is to ensure tax is not paid unless the total amount received exceeds the premiums paid, and you received bonuses in excess of premiums paid, the discretion is not applicable here.

As a result, the total amount you received as the reversionary bonus is in excess of premiums paid.

Therefore, the Commissioner is unable to exercise the discretion in the circumstances and an amount under subsection 26AH(6)(a) of the ITAA 1936 will be included in your assessable income.

Question 5

Will the Commissioner form an opinion that it would be unreasonable to include any amount of income received on the surrender of the policy in your assessable income?

Summary

The Commissioner will not form the opinion that it is unreasonable to include the amount received on surrender of the Policy in your assessable income.

Detailed reasoning

There is nothing else in section 26AH of the ITAA 1936 that provides the Commissioner with a discretion to vary its operation to reduce the assessable amount of a reversionary bonus taking into account the personal circumstances of a taxpayer.

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