Edited version of private ruling

Authorisation Number: 1011764596511

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Ruling

Subject: Income - insurance Bond

Question 1

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 commenced on

1 July 2010

Relevant facts

The trustees of Trust A purchased an insurance bond from Company A in Country A for a single premium.

The Lives Assured were Person A and Person B.

The date of commencement of risk was the 2000-01 income year.

The Death Benefit is 101% of the Encashment Value.

The terms are Joint Life- Last Death.

Person C was made absolutely entitled to the Country A investment bond under a Clause of the deed of variation.

The insurance bond has been assigned to you by Person C

Assumptions

None

Relevant legislative provisions

Section 26AH of the Income Tax Assessment Act 1936

Section 6-5(2) of the Income Tax Assessment Act 1997

Section 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

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income from all sources, whether in or out of Australia.

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.

Subsection 6-10(4) 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 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with reversionary bonuses and 15-75 of the ITAA 1997 which deal with insurance bonuses.

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 2011-12 income year the ten year period has expired. Accordingly section 26AH of the ITAA 1936 will not apply to assess any reversionary bonus.