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Ruling

Subject: Lump sum payment received on surrender of life insurance policy

Question

Will the lump sum payment you receive from surrendering your life insurance policy be included in your assessable income?

Answer

No.

This ruling applies for the following period:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You took out a whole of life insurance policy in 1979.

You have paid quarterly premiums toward the policy.

You intend to surrender the policy during the 2011-12 income year.

When you surrender the policy you will receive a lump sum payment, including bonuses.

Relevant legislative provisions

Income Tax Assessment Act 1997 6-5,

Income Tax Assessment Act 1997 6-10, and

Income Tax Assessment Act 1997 15-75.

Reasons for decision

Your assessable income includes ordinary income and statutory income (sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997).

Statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law (section 6-10 of the ITAA 1997).

Taxation Ruling IT 2504 discusses life assurance policies and states that bonuses received on a policy of life assurance are not income according to ordinary concepts and are therefore not assessable income under section 6-5 of the ITAA 1997.

In your case, the lump sum payment (including bonuses) you will receive when you surrender your life insurance policy is not ordinary income. However, it is necessary to consider whether the lump sum amount will constitute statutory income.

The specific provisions of the income tax law which are relevant to life insurance policies are discussed below.

Section 15-75 of the ITAA 1997 provides that the assessable income of a taxpayer includes any amount received as a bonus, other than a reversionary bonus, on a life insurance policy. A reversionary bonus is one paid on maturity, forfeiture or surrender of a life insurance policy.

In your case, any bonuses included in the lump sum payment you will receive will be paid on surrender of the policy, and are therefore reversionary bonuses. As such, section 15-75 of the ITAA 1997 does not apply.

Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in assessable income certain reversionary bonuses received in respect of life assurance policies where the date of commencement of the policy is after 27 August 1982.

Your policy commenced before 27 August 1982, so section 26AH of the ITAA 1936 does not apply.

The capital gains tax (CGT) provisions operate in certain circumstances when there is a disposal of an asset. However, as your life insurance policy was acquired prior to 20 September 1985, the CGT provisions also have no application.

The lump sum payment you will receive on surrender of your life insurance policy is not assessable income as it is neither ordinary nor statutory income. You therefore do not have to pay income tax on this amount.