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Ruling

Subject: Assessability of proceeds from a foreign life insurance policy

Question

Are the proceeds from a foreign life insurance policy received by the deceased estate assessable in Australia?

Answer

No

Relevant facts

You are the trustee for the deceased estate.

The deceased was an Australian resident who worked overseas. He died intestate and did not have any dependents.

The deceased was covered by a foreign insurance policy taken out by his employer under a group policy.

The policy provides payment on death and disability only and there was no nominated beneficiary.

There were no contracts of reinsurance with any Australian resident insurers.

The beneficial owners of the policy were the employer.

The proceeds exceeded $50,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 6-10,

Income Tax Assessment Act 1997 Section 118-300,

Income Tax Assessment Act 1936 Section 482,

Income Tax Assessment Act 1936 Section 483,

Income Tax Assessment Act 1936 Section 485.

Reasons for decision

The assessability of income falls for consideration under Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997). Under Division 6 amounts which are included in the taxpayer's assessable income include:

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).

Section 995-1 of the ITAA 1997 provides that a life insurance policy has the meaning given to the expression 'life policy' in the Life Insurance Act 1995.

Section 9 of the Life Insurance Act defines a 'life policy' to include a contract of insurance that provides a payment of money on the death of a person. Income attributable to FLP falls for consideration under statutory income provisions.

The Foreign Investment Fund (FIF) measures contained in Part XI of the Income Tax Assessment Act 1936 (ITAA 1936) can apply to a taxpayer's interest in a FLP. Subsection 485(4) of the ITAA 1936 provides that the FLP regime applies where the following conditions exist:

· the taxpayer had an interest or interests in a FLP at any time during the notional accounting period of the FLP that ends in a year of income; and

· the year is later than the 1992/1993 year of income; and

· the taxpayer was an Australian resident at any time in that year of income.

Subsection 483(3) of the ITAA 1936 provides that a person has an interest in a FLP if the person has the legal title to the FLP. As policy holder, you had legal title to the policy. As you had an interest in a FLP, and you were a resident during that year, the FIF measures may apply.

Four categories of policies are excluded from the operation of the FLP regime under section 482 of the ITAA 1936. The excluded policies are:

· an Australian policy;

· policies providing payment on death or permanent disability only;

· policies issued before 1 July 1992 which cannot after that date be cancelled, surrendered or redeemed and for which the terms have not after that date been altered in a material way;

· a contract of reinsurance between a resident insurer and a non resident insurer in relation to life assurance policies which provide only life cover.

As the policy provided for payment on death or permanent disability the proceeds received by the trustee from the deceased's foreign life insurance policy are not assessable as foreign investment fund income. 

It must now be determined whether the amount in question is taxable under other relevant statutory income provisions. 

The capital gains tax provisions can operate to tax gains on certain life insurance policies. However, section 118-300 of the ITAA 1997 says that a capital gain made from a capital gains event that happens to a life insurance policy by a taxpayer who acquired an interest in the policy for no consideration is not assessable. Since the deceased acquired his interest for no consideration the gain on the policy is not taxed under the capital gains tax provisions.

The proceeds paid to the trustee of the estate under the foreign life insurance policy will therefore not be assessable.