Edited version of private ruling

Authorisation Number: 1011764569978

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Ruling

Subject: Income - Insurance Bond

Question 1

When you become absolutely entitled to the insurance bond is it's market value included in your assessable income?

Answer: No

Question 2

If the insurance bond is assigned to Trust A are you exempt from capital gains tax (CGT) ?

Answer: Yes

Question 3

If the insurance bond is redeemed after the 2010-11 income year is the reversionary bonus assessable income?

Answer: No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

1 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.

Person A late of Country A died in the 1999-00 income year.

Probate of the Will was granted in the 1999-00 income year

Person B of Country A was the sole residuary beneficiary of the estate.

A Deed of Variation was made in the 20XX income year between Person B and the executors of the Estate of late Person A.

The Deed of Variation provides that Person B wishes that Person A be deemed on the day of their death to have duly executed a valid new will and that their estate be distributed on the terms of this new will.

The trustees of Trust B purchased an insurance bond for a single premium.

The Lives Assured were Person C and Person D.

The date of commencement of risk was the 20XX income year.

The Death Benefit is 101% of the Encashment Value.

The terms are Joint Life- Last Death.

You were made absolutely entitled to the foreign investment bond under a Clause of the deed of variation.

Investment bonds in Country A are entitled to a notional tax credit on the increase in value of the bond.

Relevant legislative provisions

Section 26AH of the Income Tax Assessment Act 1936

Section 99B of the Income Tax Assessment Act 1936

Subsection 99B(1) of the Income Tax Assessment Act 1936

Subsection 99B(2) of the Income Tax Assessment Act 1936

Paragraph 99B(2)(a) of the Income Tax Assessment Act 1936

Subsection 6-10(2) of the Income Tax Assessment Act 1997

Subsection 6-10(4) of the Income Tax Assessment Act 1997

Section 10-5 of the Income Tax Assessment Act 1997

Section 15-75 of the Income Tax Assessment Act 1997

Section 102-5 of the Income Tax Assessment Act 1997

Section 104-75 of the Income Tax Assessment Act 1997

Paragraph 104-75(6)(a) of the Income Tax Assessment Act 1997

Subsection 108-5(1) of the Income Tax Assessment Act 1997

Section 118-300 of the Income Tax Assessment Act 1997

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia. Subsection 6-10(2) of the ITAA 1997 states that statutory income are amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income which are statutory income. Included in this list is section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) dealing with amounts paid to or applied for the benefit of a beneficiary, capital gains in terms of section 102-5 of the ITAA 1997, insurance bonuses in terms of 26AH of the ITAA 1936 and 15-75 of the ITAA 1997.

Subsection 99B(1) of the ITAA 1936 provides that where at any time during the year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust estate who was a resident at any time during that year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2), include that amount.

Subsection 99B(2) of the ITAA 1936 reduces the amount included as assessable income under subsection 99B(1) of the ITAA 1936 in certain circumstances.

Paragraph 99B(2)(a) of the ITAA 1936 provides that so much of the amount representing the corpus of the trust estate is excluded from assessable income.

The insurance bond forms part of the corpus of the Trust B. Accordingly the receipt of the insurance bond by you does not form part of your assessable income in terms of section 99B of the ITAA 1936.

CGT assets are broadly defined in sub section 108-5(1) of the ITAA 1997 as: (a) any kind of property; or (b) a legal or equitable right that is not property.

An insurance bond is accordingly a CGT asset.

Division 128 of the ITAA 1997 sets out what happens on death and a CGT asset owned just before death devolves to the legal personal representative or passes to a beneficiary in the estate.

The insurance bond which was transferred to you by Trust B was not an asset owned by Person A just before death so accordingly Division 128 of the ITAA 1997 does not apply.

A capital gain or capital loss can only arise when a CGT event occurs. Division 104 of the ITAA 1997 lists the specific CGT events.

CGT Event E5 (section 104-75 of the ITAA 1997) occurs if a beneficiary becomes absolutely entitled to a CGT asset of the trust as against the trustee:

The time of the event is when you became absolutely entitled to the insurance bond.

As you did not incur any expenditure to acquire the insurance bond any capital gain or loss from this event is disregarded (paragraph 104-75(6)(a) of the ITAA 1997).

Section 118-300 provides an exemption for gains or losses from the transfer (or other listed CGT event) of an interest in a life insurance policy or an annuity instrument in the following circumstances.

A life insurance policy or annuity instrument where the taxpayer is:

· The original beneficial owner of the policy or instrument

· An entity that acquired the interest in the policy or instrument for no consideration

You will be exempt from CGT under this section if you assign the insurance bond to Trust A.

Assessability of bonus on redemption

Paragraph 2 of Taxation Ruling IT 2504 provides that bonuses received on a policy of life assurance are not income according to ordinary concepts and therefore do not constitute assessable income under subsection 6-5(2) of the ITAA 1997. However, statutory income is not ordinary income but is included in assessable income due to specific provisions of the ITAA 1936 & ITAA 1997.

Bonuses, other than reversionary bonuses, received from a life assurance policy are included in your assessable income under section 15-75 of the ITAA 1997.

The terms bonus and reversionary bonus are not defined in the Acts. In life insurance terms, a bonus is generally accepted as any surplus or profit made by the insurer out of the amount invested. A bonus is said to be reversionary when the entitlement to the bonus accrues upon maturity of the policy and is not payable annually.

Section 26AH of the ITAA 1936 provides for the taxation of reversionary bonuses paid under short term life insurance policies where the date of commencement of risk is after 27 August 1982. The effect of section 26AH of the ITAA 1936 is that 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 (paragraph 3 of IT 2504).

The commencement of risk of your policy was the 20XX income year. If the insurance bond is redeemed after the 2010-11 income year the ten year period has expired. Accordingly section 26AH of the ITAA 1936 will not apply to assess any reversionary bonus.

Note

A foreign income tax offset is available in some circumstances where foreign tax is paid. A notional tax credit does not represent tax paid