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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1011989577130

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Insurance Partnership Arrangement

Questions

Are insurance proceeds (ie, the death benefit and non-death benefit) paid to the Applicants in satisfaction of rights under a co-owned policy 'statutory income' within the meaning of subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

In the financial year during which an Insurer pays a death benefit or a non-death benefit to the Applicants, are the Applicants an 'association of persons in receipt of statutory income jointly' and therefore a 'tax law partnership' pursuant to subsection 995-1(1) of the ITAA 1997?

Subject to the eligibility of an individual Applicant to a CGT exemption, is the payment of insurance proceeds a capital gain from a CGT event happening in relation to a tax law partnership or one of its CGT assets within the meaning of section 106-5 of the ITAA 1997?

Subject to the eligibility of an individual Applicant to a CGT exemption, is the payment of insurance proceeds a capital gain from a CGT event happening in relation to a tax law partnership or one of its CGT assets made by the Applicants individually within the meaning of section 106-5 of the ITAA 1997?

Subject to the eligibility of an individual Applicant to a CGT exemption, is the individual Applicant's share of the insurance proceeds included in the individual Applicant's assessable income within the meaning of section 106-5 of the ITAA 1997?

Is the amount of an individual Applicant's share of the insurance proceeds determined in accordance with the Agreement in accordance with section 106-5 of the ITAA 1997?

If the amount of an individual Applicant's share of the insurance proceeds depends on the nature of the benefit (eg, death benefit or non-death benefit), is the amount of the individual Applicant's share of the insurance proceeds determined in accordance with the Agreement in accordance with section 106-5 of the ITAA 1997?

If the Applicants do not constitute a tax law partnership, then, subject to the eligibility of an individual Applicant to a CGT exemption, will the payment of insurance proceeds result in a capital gain or capital loss from a CGT event happening in relation to an individual Applicant's CGT asset made by the Applicants individually?

Yes

Where a CGT asset consists of a part of, or an interest in, a CGT asset, is the identity and amount of the CGT asset held by each Applicant determined in accordance with section 108-5 of the ITAA 1997?

Where a CGT asset consists of a part of, or an interest in, an asset within the meaning of paragraph 108-5(2)(a) of the ITAA 1997, is the amount of an individual Applicant's share of a death benefit or non-death benefit determined in accordance with the Agreement for the purposes of section 108-5 of the ITAA 1997?

Yes

Is the CGT liability with respect to a death benefit under a co-owned policy disregarded pursuant to subsection 118-300(1) of the ITAA 1997?

A.Existing policies of insurance are varied to give effect to co-ownership

Only the Applicant who was the policy owner at the time the policy was effected will be entitled or required to disregard a capital gain or capital loss pursuant to subsection 118-300(1) of the ITAA 1997.

B. Existing policies of insurance are cancelled and new policies are obtained to give effect to joint ownership

Yes

Is the entitlement to an exemption under subsection 118-300(1) of the ITAA 1997 determined at the level of the individual Applicant?

Yes

Is the interest of an Applicant in a death benefit under a co-owned policy an interest in rights under a policy within the meaning of subsection 118-300(1) of the ITAA 1997?

Yes

Is the amount of the interest of an individual Applicant in the rights under a co-owned policy determined in accordance with the Agreement for the purposes of subsection 118-300(1) of the ITAA 1997?

Yes

Is each Applicant a 'beneficial owner' of a co-owned policy (or an interest in rights under a co-owned policy) within the meaning of subsection 118-300(1) of the ITAA 1997?

Is each Applicant an 'original beneficial owner' of a co-owned policy (or an interest in rights under a co-owned policy) within the meaning of subsection 118-300(1) of the ITAA 1997?

A. Existing policies of insurance are varied to give effect to co-ownership

Only the Applicant who was the policy owner at the time the policy was effected will be an 'original beneficial owner' of a co-owned policy pursuant to item 3 of the table in subsection 118-300(1) of the ITAA 1997.

b. Existing policies of insurance are cancelled and new policies are obtained to give effect to co-ownership

Yes

Is a capital gain with respect to a death benefit disregarded in the case of an individual Applicant pursuant to subsection 118-300(1) of the ITAA 1997?

A. Existing policies of insurance are varied to give effect to co-ownership

B. Existing policies of insurance are cancelled and new policies are obtained to give effect to co-ownership

Yes

Is the CGT liability with respect to a non-death benefit under a co-owned policy determined in accordance with paragraph 118-37(1)(b) of the ITAA 1997?

Yes

Is the entitlement to the exemption under paragraph 118-37(1)(b) of the ITAA 1997 determined at the level of the individual Applicant?

Yes

Is the payment of a non-death benefit under a co-owned policy compensation or damages for a wrong, injury or illness pursuant to paragraph 118-37(1)(b) of the ITAA 1997?

Yes

If an Applicant is the life insured, is a non-death benefit compensation or damages the Applicant receives for a wrong, injury or illness the Applicant suffers personally pursuant to paragraph 118-37(1)(b) of the ITAA 1997??

Yes

If an Applicant is a relative of the life insured within the meaning of subsection 995-1(1) of the ITAA 1997, is a non-death benefit compensation or damages the Applicant receives for a wrong, injury or illness a relative of the Applicant (namely the life insured) suffers personally pursuant to paragraph 118-37(1)(b) of the ITAA 1997?

Yes

Is the amount of the interest of an individual Applicant in a non-death benefit payable under a co-owned policy determined in accordance with the Agreement for the purposes of paragraph 118-37(1)(b) of the ITAA 1997?

Yes

Is a capital gain with respect to a non-death benefit disregarded in the case of an individual Applicant pursuant to paragraph 118-37(1)(b) of the ITAA 1997??

Yes

Is an Applicant's interest in the Agreement a separate CGT asset, the disposal of which might result in a capital gain?

Yes

Is any capital gain arising from the proceeds payable under the terms of the Agreement disregarded in accordance with paragraph 118-37(1)(b) of the ITAA 1997?

Is any capital gain arising from the proceeds payable under the terms of the Agreement disregarded in accordance with item 3 of the table in subsection 118-300(1) of the ITAA 1997?

Does the statement in section 106-5 of the ITAA 1997 that the capital gain of a partnership (ie, with respect to the policy) is made by the partners individually mean that the Applicants individually are deemed to have disposed of their interest in a co-owned policy?

Is the mechanical provision in the Agreement that requires payment of the Applicant's proportionate share of the insurance proceeds not merely a "more proximate right to payment" of the Applicant's proportionate share of the insurance proceeds (so that it is more appropriate to regard the capital proceeds as with respect to an "underlying asset", namely the insurance policy, within the meaning of the "underlying asset approach" as discussed in paragraph 23 of TD 2008/22)?

If the collective of the Applicants is not an entity that is liable to pay income tax, does the payment of a proportionate share of the death benefit by the collective of Applicants to the individual Applicant in accordance with the Agreement retain its character as a death benefit?

Yes

Does the definition of the beneficial interest of the Applicant in the Agreement define the beneficial ownership of the death benefit under a co-owned policy?

Yes

Does the definition of the beneficial interest of the Applicant in the Agreement define the beneficial ownership of the non-death benefit under a co-owned policy?

Yes

If the ATO does not accept that the Agreement defines the beneficial interest of the Applicants in a co-owned policy, does the Agreement constitute a constructive trust for and on behalf of the Applicants in the agreed proportions?

Yes

If the Applicant is the life insured under a co-owned policy, is the non-death benefit payable under the Agreement compensation or damages the Applicant receives for a wrong, injury or illness the Applicant suffers personally?

If the Applicant is a relative of the life insured under a co-owned policy within the meaning of subsection 995-1(1) of the ITAA 1997, is a non-death benefit payable under the Agreement compensation or damages the Applicant receives for a wrong, injury or illness the relative of the Applicant (namely the life insured) suffers personally?

If the ATO considers that the Applicants are deemed to have received the insurance proceeds in a different proportion than that set out in the Agreement (eg, it considers that they are deemed to have received the insurance proceeds in equal shares), then does the legal or beneficial obligation of the Applicant who is deemed to have received an amount in excess of its entitlement to disgorge the amount of the excess to the other Applicant create an amount that forms part of the cost base for the disposal of its rights under the Agreement (such that it makes a capital loss on the disgorgement)?

Not applicable

This ruling applies for the following periods:

Income year ended 30 June 2012

Income year ended 30 June 2013

Income year ended 30 June 2014

The scheme commences on:

This scheme is prospective and will not be implemented until the Private Ruling issues.

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.

The Applicants are husband and wife.

Currently, the Applicants each hold an insurance policy as the sole policy owner and insuring their own life.

The insurance policies were issued on the terms and conditions of the respective Insurers' product disclosure statements (PDS).

Each insurance policy will pay a 'death benefit' or 'non-death benefit' to the policy owner in certain circumstances.

Assumptions

For the purpose of this ruling, the Commissioner has made the following assumptions:

· The Applicants will be residents of Australia pursuant to subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

· The Applicants will enter into a legally enforceable agreement ('the Agreement') before the occurrence of an insured event.

· The Applicants will be the only parties to the Agreement.

· The Agreement entered into by the Applicants will be, in substance, the same as the draft Agreement provided to the Commissioner of Taxation (the Commissioner) for the purpose of making this Ruling.

· The Applicants shall ensure that each policy of insurance is issued in the name of the policy owners specified in the Schedule to the Agreement; namely, the Applicants, jointly.

To effect a joint policy of insurance, each Applicant will either:

· vary their existing policy (refer paragraphs 2 to 4, above); or

· cancel their existing policy and obtain a suitable replacement policy with the same Insurer containing the same cover types as their existing policy and subject to the PDS issued by the Insurer at the time to policy is effected;

· to give effect to joint ownership of the policies (referred to as 'co-owned policy(ies)').

The Applicants intend to hold each co-owned policy as tenants in common.

The dealings between the Applicants and the Insurers will be at arm's length and on a commercial basis.

The substance of the co-owned policies will not vary from the current policies held individually by the Applicants (refer paragraphs 2 to 4, above) other than in accordance with the Insurers' PDS.

The Applicants will be listed on the relevant insurance policy as 'Policy Owners'.

Upon the occurrence of an insured event under a co-owned policy, the Insurer will pay the insurance proceeds to the Policy Owners jointly.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6-10(2)

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 section 100-25

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 paragraph 104-25(1)(b)

Income Tax Assessment Act 1997 subsection 104-25(3)

Income Tax Assessment Act 1997 section 106-5

Income Tax Assessment Act 1997 subsection 106-5(1)

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 Division 108

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 paragraph 108-5(2)(a)

Income Tax Assessment Act 1997 paragraph 108-5(1)(b)

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 paragraph 110-25(2)(a)

Income Tax Assessment Act 1997 subsection 110-55(2)

Income Tax Assessment Act 1997 paragraph 116-20(1)(a)

Income Tax Assessment Act 1997 section 118-37

Income Tax Assessment Act 1997 paragraph 118-37(1)(b)

Income Tax Assessment Act 1997 section 118-300

Income Tax Assessment Act 1997 subsection 118-300(1)

Income Tax Assessment Act 1997 subsection 118-300(2)

Income Tax Assessment Act 1997 subsection 995-1(1)

Insurance Contracts Act 1984

Life Insurance Act 1995 subsection 10(2)

Life Insurance Act 1995 subsection 200(1)

Partnership Act 1891 (QLD) subsection 5(1)

Reasons for decision

These reasons for decision accompany the Notice of private ruling issued to the Applicants.

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

Please note, this advice reflects the Commissioner's current view of the law as it applies to the arrangement subject of your private ruling. A similar matter is before the Administrative Appeals Tribunal (AAT) and the Commissioner's view may be subject to change in the future.

Question 1:

Answer:

No.

Insurance proceeds paid by the Insurers to the Applicants in their capacity as Policy Owners upon the occurrence of an insured event will form part of the capital proceeds for capital gains tax (CGT) event C2. Any capital gain resulting from the CGT event will be taken into account in working out whether an Applicant has made a net capital gain. An Applicant's net capital gain, if any, for an income year will be included in the Applicant's assessable income pursuant to subsection 102-5(1) of the ITAA 1997 and will constitute statutory income pursuant to subsection 6-10(2) of the ITAA 1997.

Detailed reasoning

Subsection 995-1(1) of the ITAA 1997 states that statutory income has the meaning given by section 6-10 of the ITAA 1997. Subsection 6-10(2) of the ITAA 1997 provides that amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income. Subsection 102-5(1) of the ITAA 1997 provides that your assessable income includes a net capital gain.

Pursuant to paragraph 104-25(1)(b) of the ITAA 1997, CGT event C2 happens when the ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. An interest in rights under a life insurance policy is an intangible CGT asset (paragraph 108-5(1)(b) of the ITAA 1997). Insurance proceeds paid in satisfaction of rights under an insurance policy constitute capital proceeds for CGT event C2 pursuant to paragraph 116-20(1)(a) of the ITAA 1997.

Where, having regard to the provisions of Part 3-1 and Part 3-3 of the ITAA 1997, one or both of the Applicants make a capital gain as a result of the occurrence of CGT event C2, that capital gain will be taken into account in working out whether an Applicant has made a net capital gain. An Applicant's net capital gain, if any, for an income year will be included in the Applicant's assessable income pursuant to subsection 102-5(1) of the ITAA 1997 and will constitute statutory income pursuant to subsection 6-10(2) of the ITAA 1997.

Question 2:

Answer:

No.

The receipt of insurance proceeds by the Applicants does not establish a tax law partnership pursuant to subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

Subsection 995-1(1) of the ITAA 1997 defines a partnership as:

· an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

· a limited partnership.

The arrangement to which this Ruling relates does not involve a limited partnership within the meaning of subsection 995-1(1) of the ITAA 1997. Further, there is no evidence supporting the existence of a general law partnership because the Applicants are not carrying on a business in common with a view to profit.¹

Therefore, it must be established whether the Applicants constitute an association of persons in receipt of ordinary or statutory income jointly (referred to as a 'tax law partnership'). Whether or not the Applicants constitute a tax law partnership is a question of fact to be determined in the circumstances of the case.

In receipt of statutory income jointly

Upon the occurrence of an insured event, the relevant Insurer will pay any insurance proceeds to the Applicants in their capacity as Policy Owners jointly. This is the practice of the Insurers at the time this Ruling is made. As result, the Applicants will receive the insurance proceeds jointly.

As discussed in response to Question 1, above, the receipt of insurance proceeds does not, in itself, result in the receipt of statutory income pursuant to the definition of statutory income in section 6-10 of the ITAA 1997. However, where the capital proceeds exceed the cost base of the CGT asset, any capital gain that arises from the CGT event will be used in calculating whether an Applicant has made a net capital gain to be included in their assessable income pursuant to subsection 102-5(1) of the ITAA 1997.

Where CGT event C2 happens in relation to a co-owned policy, the relevant CGT assets are the individual interests of each Applicant in rights under the policy. Accordingly, a separate CGT event happens in relation to each Applicant's CGT asset. Each Applicant must calculate their capital gain or capital loss by reference to their own personal tax affairs.

Whilst the capital proceeds may be received by the Applicants jointly, it cannot be said that they will be in receipt of statutory income jointly. This is because each Applicant separately, rather than jointly, will make a capital gain or capital loss from a CGT event that happens to their interest in a separate and identifiable CGT asset.

Conclusion

The arrangement does not establish a tax law partnership pursuant to subsection 995-1(1) of the ITAA 1997 because the Applicants will not be in receipt of ordinary or statutory income jointly under the arrangement.

Question 3:

Answer:

No.

As discussed above, the arrangement to which this Ruling applies does not establish a partnership pursuant to subsection 995-1(1) of the ITAA 1997. Therefore, section 106-5 of the ITAA 1997 has no application.

Question 4:

Subject to the eligibility of an individual Applicant to a CGT exemption, is the payment of insurance proceeds a capital gain from a CGT event happening in relation to a tax law partnership or one of its CGT assets made by the Applicants individually within the meaning of section 106-5 of the ITAA 1997?

Answer:

No.

Question 5:

Answer

No.

Question 6:

Is the amount of an individual Applicant's share of the insurance proceeds determined in accordance with the Agreement in accordance with section 106-5 of the ITAA 1997?

Answer:

No.

Question 7:

Answer:

No.

Question 8:

Answer:

Yes.

Subject to the eligibility of an individual Applicant to a CGT exemption, each Applicant has a separate CGT asset, being their interests in rights under a co-owned policy, and must calculate their capital gain or capital loss individually. The payment of insurance proceeds to an Applicant may result in a capital gain or capital loss from CGT event C2 happening to that individual Applicant's CGT asset.

Detailed reasoning

CGT asset

An Applicant's legally enforceable rights under a co-owned policy will constitute a CGT asset pursuant to subsection 108-5(1) of the ITAA 1997. To avoid doubt, paragraph 108-5(2)(a) of the ITAA 1997 confirms that a part of, or an interest in, a legal or equitable right that is not property will constitute a CGT asset.

Section 108-7 of the ITAA 1997 specifically provides that both joint tenants and tenants in common will be treated as if they each owned a separate CGT asset.

Therefore, each Applicant has a separate and identifiable CGT asset, being their interest in rights under the co-owned policies.

CGT event

Pursuant to paragraph 104-25(1)(b) of the ITAA 1997, CGT event C2 happens when the ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied, that is, when the Insurer makes payment of insurance proceeds to the Applicants and the Applicants' legal and equitable rights to a benefit under a co-owned policy, or part of a policy, end.

Capital gain or capital loss

An Applicant will make a capital gain as a result of CGT event C2 where the capital proceeds from the ending of the asset exceed the cost base of the asset. An Applicant will make a capital loss where the reduced cost base of the asset exceeds the capital proceeds from the ending of the asset (subsection 104-25(3) of the ITAA 1997).

Capital proceeds, cost base and reduced cost base

As discussed in response to Question 1, above, insurance proceeds paid by an Insurer as a result of their obligations under a co-owned policy constitute capital proceeds used in the calculation of a capital gain or capital loss pursuant to paragraph 116-20(1)(a) of the ITAA 1997. Each Applicant's capital proceeds will be the amount of insurance proceeds they have received or are entitled to receive in respect of the ending of their CGT asset (paragraph 116-20(1)(a) of the ITAA 1997).

The cost base or the reduced cost base of the CGT asset will include the insurance premiums paid, or required to be paid, by the individual Applicant (paragraph 110-25(2)(a) and subsection 110-55(2) of the ITAA 1997).

Therefore, subject to the eligibility of an individual Applicant to a CGT exemption or requirement to disregard a capital loss, the payment of insurance proceeds to an Applicant may result in a capital gain or capital loss from CGT event C2 happening to that individual Applicant's CGT asset.

Question 9:

Answer:

No.

Where a CGT asset consists of a part of, or an interest in, a CGT asset pursuant to paragraph 108-5(2)(a) of the ITAA 1997, section 108-5 does not determine the amount of the CGT asset held by each Applicant.

Detailed reasoning

Division 108 of the ITAA 1997 defines various categories of assets that are relevant to calculating a capital gain or capital loss. Section 108-5 of the ITAA 1997 sets out what a CGT asset is and provides some specific examples of CGT assets. However, where a CGT asset consists of a part of, or an interest in, a CGT asset pursuant to paragraph 108-5(2)(a) of the ITAA 1997, section 108-5 of the ITAA 1997 does not determine each Applicant's interests in the CGT asset.

As discussed in response to Question 8, above, each Applicant will have separate and identifiable CGT assets, being their interest in rights under each co-owned policy.

Question 10:

Answer:

Yes.

The co-owned policies will reflect the legal interests of the Applicants. However, the terms of the Agreement reflect the Applicants' beneficial interests in the rights under the co-owned policies.

Detailed reasoning

The Life Insurance Act 1995 and the Insurance Contracts Act 1984 legislate the dealings between insurance companies and insured persons. The co-owned policies which will be held by the Applicants will constitute life insurance policies for the purposes of the Life Insurance Act and contracts of insurance for the purposes of the Insurance Contracts Act.

Subsection 10(2) of the Life Insurance Act provides that the owner of a policy of life insurance is the person whom the policy is issued to or, if the rights of that person have been assigned under the Act or transferred by the operation of the policy, the person who has those rights.

The Applicants will jointly own the co-owned policies pursuant to subsection 10(2) of the Life Insurance Act because they will be listed as policy owners on the policy schedules for the respective life insurance policies. However, the policy documents do not define the proportions of each Applicant's interest in the rights under each co-owned policy.

The Insurers' PDS provide, specifically or by implication, that co-owned policies will be held by two or more persons listed as policy owners as joint tenants.

Where an Applicant's legal and equitable interests in rights under a co-owned policy are the same, those interests will constitute their CGT asset pursuant to section 108-5 of the ITAA 1997 and they must calculate whether or not they have made a capital gain or capital loss in respect of any amount received in connection with those interests.

Beneficial ownership

Under the terms of the Agreement, each Applicant agrees to transfer some of their legal rights to the other Applicant in exchange for that other Applicant assuming a corresponding proportion of the obligations under the policy (ie, payment of insurance premiums to the Insurer in proportion to their entitlement to benefits under the policy). Although the arrangement is intended to result in the transfer of a proportion of the Applicants' legal and beneficial interests in the co-owned policies, in circumstances where there has been no effective transfer at law, the arrangement will result in the creation of beneficial interests recognisable in equity. In these circumstances, the terms of the Agreement make provision for the distribution of insurance proceeds other than in accordance with the terms of the co-owned policies, that is, other than in equal shares as joint tenants.

An assignment is the immediate transfer of a proprietary right, vested or contingent, from the assignor to the assignee. An assignment may be recognised at law or in equity. Subsection 200(1) of the Life Insurance Act provides that the rights of a policy owner may only be assigned at law under this section. The arrangement subject of this private ruling will not give rise to an effective assignment at law pursuant to subsection 200(1) of the Life Insurance Act.

Although the Agreement, in itself, does not give rise to an effective assignment at law, equity will recognise an equitable assignment where there is a clear, manifest intention to divest the assignor of property and vest it in the assignee and the assignment is for valuable consideration.² In these circumstances, equity will hold the parties to their promise by recognising the assignee as having acquired a beneficial interest in the subject property. This will give the equitable assignee immediate rights as against the assignor.³

The Agreement evidences a manifest intention on behalf of the relevant Applicant (assignor) to assign part of their proprietary rights in one or both of the co-owned policies to the other Applicant (assignee) in consideration for the assignee assuming corresponding obligations as set out in the Agreement, such as the payment of insurance premiums by the assignee to the assignor or to the Insurer on behalf of the assignor in accordance with their assigned interest in the co-owned policy(ies).

Once the conditions of an equitable assignment have been satisfied, the legal interests (the rights under a co-owned policy) are held on trust for the assignee as the equitable or beneficial owner in proportion to their interest. Therefore, there is trust property in the form of legal rights held on trust for the beneficial owner.

The beneficial owner will have enforceable equitable rights in the property such that, upon the happening of an insured event, equity will recognise the beneficial owner as having a better claim to their respective interests in the insurance proceeds than the legal title holder or a third party beneficiary who may be listed on the co-owned policy contrary to the Agreement.

Any amounts received by the beneficial owner are derived by virtue of their equitable ownership of rights under the co-owned policy and not because of their interest in the Agreement. The Agreement specifies the rights and obligations of the parties to the Agreement in respect of their interests in the co-owned policies. Accordingly, any insurance proceeds which are receivable by the beneficial owner are so receivable by reason of their equitable ownership of interests in the relevant policy, not because of their rights under the Agreement.

Question 11:

Is the CGT liability with respect to a death benefit under a co-owned policy disregarded pursuant to subsection 118-300(1) of the ITAA 1997?

A. Existing policies of insurance are varied to give effect to co-ownership

An Applicant will only be entitled or required to disregard a capital gain or capital loss pursuant to item 3 of the table in subsection 118-300(1) of the ITAA 1997 where they are an original beneficial owner of the policy. As the Applicants have varied their existing policies to give effect to co-ownership, the Applicant who has been added to the policy will not be an original beneficial owner of the policy. Only the Applicant who was the policy owner at the time the policy was effected will be an original beneficial owner of the policy and entitled or required to disregard a capital gain or capital loss pursuant to subsection 118-300(1) of the ITAA 1997.

Detailed reasoning

Subsection 118-300(1) of the ITAA 1997 will apply to disregard any capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is your interest in rights under a general insurance policy, a life insurance policy or an annuity instrument where certain criteria are satisfied.

Item 3 of the table in subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event happening in relation to a CGT asset that is your rights under a policy of insurance on the life of an individual is disregarded if you are the original beneficial owner of the policy.

Each co-owned policy will contain a cover type which will pay a death benefit upon the death of the life insured. This type of insurance cover falls within section 118-300 of the ITAA 1997 (see Taxation Determination TD 2007/4 Income tax: capital gains tax: is a 'policy of insurance on the life of an individual' in section 118-300 of the Income tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression? (TD 2007/4)).

Item 3 of the table in subsection 118-300(1) of the ITAA 1997 applies to the 'original beneficial owner' of a policy of insurance on the life of an individual.

The term 'original beneficial owner' is not defined in the tax acts and there have been no decided cases on the issue. However, paragraph 2 of Taxation Determination TD 94/31 Income tax: capital gains: what is meant by the term "original beneficial owner" as used in subsection 160ZZI(3) of the Income Tax Assessment Act 1936 (the Act)? (TD 94/31) provides:

· Although the term "original beneficial owner" is not defined in the Act, in the context of [the section],… an "original beneficial owner" of any rights, or any interests in any rights, under a policy of life insurance is the first person who:

· at the time the policy is effected, holds such rights, or any interest in such rights, and

· possesses all the normal incidents of beneficial ownership (for example, is entitled to the benefits of the policy proceeds and has the power of management and control over the policy as well as the power to transfer, grant a security, surrender or otherwise dispose of, the policy).

Paragraph 3 of TD 94/31 specifically provides that two or more policy owners may be an original beneficial owner of the same policy.

Consequently, if a person obtains rights, or an interest in rights, under a policy of insurance on the life of an individual after the policy has been effected, they will not be entitled to disregard a capital gain or required to disregard a capital loss pursuant to item 3 of the table in subsection 118-300(1) of the ITAA 1997 because they will not possess rights or interest in rights at the time the policy is effected.

Prior to the implementation of the arrangement, the Applicants will individually own an insurance policy insuring their own lives.

In circumstances where the Applicants vary their existing policies to give effect to the intended co-ownership, only the original Applicant listed as the policy owner on the respective policy at the time it was effected will be considered to be the original beneficial owner of the policy for the purposes of item 3 of the table in subsection 118-300(1) of the ITAA 1997. This is because varying an existing insurance policy to include an additional policy owner does not result in a new policy being effected. Therefore, the Applicant who subsequently acquires a legal and/or equitable interest in one of the existing policies as a result of the implementation of the arrangement described in this ruling will not be considered an original beneficial owner of the policy.

Further, item 4 of the table in subsection 118-300(1) of the ITAA will not apply to disregard the capital gain or capital loss made by an Applicant who is not the original policy owner as they would have provided consideration for the rights they obtained under the policy as a result of their grant of reciprocal rights in their insurance policy to the other Applicant and the payment of insurance premiums in proportion to their interest.

B. Existing policies of insurance are cancelled and new policies are obtained to give effect to joint ownership

Answer:

Yes.

An Applicant will only be entitled or required to disregard a capital gain or capital loss pursuant to Item 3 of the table in subsection 118-300(1) of the ITAA 1997 where they are an original beneficial owner of the policy. As the Applicants have cancelled their existing policies and obtained new jointly owned policies, both Applicants will be an original beneficial owner of the new policies.

Detailed reasoning

Item 3 of the table in subsection 118-300(1) of the ITAA 1997 applies to the 'original beneficial owner' of a policy of insurance on the life of an individual.

The term 'original beneficial owner' is not defined in the tax acts and there have been no decided cases on the issue. However, paragraph 2 of TD 94/31 provides:

· at the time the policy is effected, holds such rights, or any interest in such rights, and

Paragraph 3 of TD 94/31 specifically provides that two or more policy owners may be an original beneficial owner of the same policy.

Prior to the implementation of the arrangement, the Applicants will individually own an insurance policy insuring their own lives. Under the arrangement, each Applicant will cancel their existing policy and obtain a suitable replacement policy with the same Insurer which contains substantially the same rights and obligations as the existing policy in the name of both Applicants.

In circumstances where the Applicants cancel their existing policies and obtain new policies in both their names as co-owners, both Applicants will be original beneficial owners of the co-owned policies for the purposes of item 3 of the table in subsection 118-300(1) of the ITAA 1997 in the proportions set out in the Agreement.

Question 12:

Is the entitlement to an exemption under subsection 118-300(1) of the ITAA 1997 determined at the level of the individual Applicant?

Answer:

Yes.

Detailed reasoning

The Applicants must individually determine the extent of any capital gain or capital loss and their entitlement or obligation to disregard any capital gain or capital loss pursuant to subsection 118-300(1) of the ITAA 1997.

As to the calculation of a capital gain or capital loss, see the discussion in response to Question 8, above.

As to the operation of subsection 118-300(1) of the ITAA 1997, see the discussion in response to Question 11, above.

Question 13:

Is the interest of an Applicant in a death benefit under a co-owned policy an interest in rights under a policy within the meaning of subsection 118-300(1) of the ITAA 1997?

Answer:

Yes.

As to the operation of subsection 118-300(1) of the ITAA 1997, see the discussion in response to Question 11, above.

Question 14:

Is the amount of the interest of an individual Applicant in the rights under a co-owned policy determined in accordance with the Agreement for the purposes of subsection 118-300(1) of the ITAA 1997?

Answer:

Yes.

While the co-owned policies will reflect the legal interests of the Applicants, the terms of the Agreement reflect the Applicants' beneficial interests in the rights under the co-owned policies.

Detailed reasoning

Subsection 118-300(1) of the ITAA 1997 applies to disregard a capital gain or capital loss you make from one of the CGT events listed in subsection 118-300(2) in relation to a CGT asset that is your interest in rights under a general insurance policy, a life insurance policy or an annuity instrument. The beneficial owner of any interests in the co-owned policy will be absolutely entitled as against the Trustee. Where a beneficiary is absolutely entitled as against the Trustee to a CGT asset, section 106-50 of the ITAA 1997 provides that the CGT provisions apply to an act done by the Trustee in relation to an asset as if the beneficiary had done it.

Therefore, provided all of the requirements of section 118-300 of the ITAA 1997 are satisfied, an Applicant with an equitable interest in a co-owned policy in the proportions set out in the Agreement will be entitled or required to disregard a capital gain or capital loss pursuant to the appropriate item of the table in subsection 118-300(1) of the ITAA 1997 to the extent of their equitable ownership of interests in the policy where a CGT event happens to their interests in a co-owned policy.

As to the calculation of a capital gain or capital loss, see the discussion in response to Question 8, above.

As to the operation of subsection 118-300(1) of the ITAA 1997, see the discussion in response to Question 11, above.

Question 15:

Is each Applicant a 'beneficial owner' of a co-owned policy (or an interest in rights under a co-owned policy) within the meaning of subsection 118-300(1) of the ITAA 1997?

Answer:

No.

The phrase used in subsection 118-300(1) of the ITAA 1997 is 'original beneficial owner'. This phrase is considered in response to Question 16, below. Correct construction of this section requires regard to be had to the words of the provision and the context of the Act. This prevents the phrase 'beneficial owner' from being considered in isolation. Whilst the Applicants may both be beneficial owners of rights under the co-owned policies, it does not necessarily follow that they will constitute 'original beneficial owners' within the meaning of subsection 118-300(1) of the ITAA 1997.

Detailed reasoning

Item 3 of the table in subsection 118-300(1) of the ITAA 1997 applies to 'the original beneficial owner' of a policy of insurance on the life of an individual.

In line with the method of statutory interpretation adopted by the courts, particular words of a statute will not be construed out of context so as to give them a meaning that is divorced from the relevant provision in which they appear. In X v Australian Prudential Regulation Authority (2007) 226 CLR 63, Kirby J noted:

The former way in which statutes were construed in Australia and elsewhere caused many statutory provisions to miss their target by an excessively narrow and literal interpretation of statutory language, read in isolation. This is not the way meaning is attributed to words in ordinary life. Such meaning is ordinarily derived from the text, viewed in its context.

Therefore, in determining the application of item 3 of the table in subsection 118-300(1) of the ITAA 1997, regard must be had to the words of the provision in the context of the Act. The requirement is that the entity is the 'original beneficial owner' of the 'policy of insurance on the life of an individual'. This does not mean that the 'original beneficial owner' of a co-owned policy pursuant to subsection 118-300(1) of the ITAA 1997 cannot also be a beneficial owner in equity.

The meaning of the phrase 'original beneficial owner' is discussed at Question 11, above.

Question 16:

Is each Applicant an 'original beneficial owner' of a co-owned policy (or an interest in rights under a co-owned policy) within the meaning of subsection 118-300(1) of the ITAA 1997?

A. Existing policies of insurance are varied to give effect to co-ownership

B. Existing policies of insurance are cancelled and new policies are obtained to give effect to co-ownership

Answer:

Yes.

Both Applicants will constitute 'original beneficial owners' of the co-owned policies pursuant to subsection 118-300(1) of the ITAA in accordance with the discussion in response to Question 11, above.

Question 17:

Is a capital gain with respect to a death benefit disregarded in the case of an individual Applicant pursuant to subsection 118-300(1) of the ITAA 1997?

A. Existing policies of insurance are varied to give effect to co-ownership

B. Existing policies of insurance are cancelled and new policies are obtained to give effect to co-ownership

Answer:

Yes.

Both Applicants will be entitled or required to disregard a capital gain or capital loss pursuant to subsection 118-300(1) of the ITAA in accordance with the discussion in response to Question 11, above.

Question 18:

Is the CGT liability with respect to a non-death benefit under a co-owned policy determined in accordance with paragraph 118-37(1)(b) of the ITAA 1997?

Answer:

Yes.

Any capital gain or capital loss made by an Applicant in receipt of a non-death benefit under a co-owned policy will be disregarded pursuant to paragraph 118-37(1)(b) of the ITAA 1997.

Detailed reasoning

Section 118-37 of the ITAA 1997 sets out a number of exempt or loss-denying transactions. Paragraph 118-37(1)(b) of the ITAA 1997 provides that a capital gain or capital loss from a CGT event relating directly to compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally is disregarded.

Subsection 995-1(1) of the ITAA 1997 defines who will constitute the 'relative of an individual' to include the 'spouse of an individual'. The Applicants are husband and wife and therefore meet the definition of spouse and relative under subsection 995-1(1) of the ITAA 1997.

Each co-owned policy will contain a cover type which will pay a non-death benefit to the Applicants in certain circumstances.

A non-death benefit paid by an Insurer to the Applicants pursuant to a co-owned policy will constitute a payment for compensation or damages for a wrong, injury or illness suffered by one of the Applicants personally.

Therefore, any capital gain or capital loss made by either Applicant will be disregarded pursuant to paragraph 118-37(1)(b) of the ITAA 1997.

Question 19:

Is the entitlement to the exemption under paragraph 118-37(1)(b) of the ITAA 1997 determined at the level of the individual Applicant?

Answer:

Yes.

Paragraph 118-37(1)(b) of the ITAA 1997 may apply to disregard a capital gain or capital loss an Applicant makes from a CGT event. As discussed in response to Question 8, above, each Applicant must individually calculate their capital gain or capital loss. In doing so, they will individually apply the exemption under paragraph 118-37(1)(b) of the ITAA 1997.

Detailed reasoning

Each Applicant must individually determine the extent of any capital gain or capital loss arising from a CGT event and their entitlement or obligation to disregard any capital gain or capital loss pursuant to paragraph 118-37(1)(b) of the ITAA 1997.

As to the calculation of a capital gain or capital loss, see the discussion in response to Question 8, above.

As to the application of paragraph 118-37(1)(b) of the ITAA 1997, see the discussion in response to Question 18, above.

Question 20:

Is the payment of a non-death benefit under a co-owned policy compensation or damages for a wrong, injury or illness pursuant to paragraph 118-37(1)(b) of the ITAA 1997?

Answer:

Yes.

As discussed in response to Question 18, above, a payment of a non-death benefit by an Insurer to an Applicant will constitute compensation or damages for a wrong, injury or illness pursuant to paragraph 118-37(1)(b) of the ITAA 1997.

Detailed reasoning

As discussed in response to Question 18, above, paragraph 118-37(1)(b) of the ITAA 1997 applies to disregard any capital gain or capital loss from a CGT event in relation to the payment of compensation of damages for a wrong, injury or illness. Whether or not a payment is compensation or damages for a wrong, injury or illness is a question of fact to be determined in the circumstances of the particular case.

Having regard to the type of cover proposed under each co-owned policy which may give rise to the payment of a non-death benefit to the Applicants upon the occurrence of an insured event, any such payment will constitute compensation or damages for a wrong, injury or illness pursuant to paragraph 118-37(1)(b) of the ITAA 1997.

Question 21:

Answer:

Yes.

Detailed reasoning

As to the application of paragraph 118-37(1)(b) of the ITAA 1997, see the discussion in response to Questions 18, 19 and 20, above.

Question 22:

Answer:

Yes.

Detailed reasoning

As to the application of paragraph 118-37(1)(b) of the ITAA 1997, see the discussion in response to Questions 18, 19 and 20, above.

Question 23:

Answer:

Yes.

Whilst the co-owned policies will reflect the legal interests of the Applicants, the terms of the Agreement reflect the Applicants' beneficial interests in the rights under the co-owned policies.

Detailed reasoning

Paragraph 118-37(1)(b) of the ITAA 1997 provides that a capital gain or capital loss from a CGT event relating directly to compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally is disregarded. The beneficial owner of any interests in the co-owned policy will be absolutely entitled as against the Trustee. Where a beneficiary is absolutely entitled as against the Trustee to a CGT asset, section 106-50 of the ITAA 1997 provides that the CGT provisions apply to an act done by the Trustee in relation to an asset as if the beneficiary had done it.

Therefore, provided all of the requirements of paragraph 118-37(1)(b) of the ITAA 1997 are satisfied, an Applicant with an equitable interest in a co-owned policy in the proportions set out in the Agreement will be entitled or required to disregard a capital gain or capital loss to the extent of their equitable ownership of interests in the policy where a CGT event happens to their interests in a co-owned policy.

As to the calculation of a capital gain or capital loss, see the discussion in response to Question 8, above.

For detailed reasoning with respect to the application of paragraph 118-37(1)(b) of the ITAA 1997, see the discussion in response to Questions 18, 19 and 20, above.

Question 24:

Is a capital gain with respect to a non-death benefit disregarded in the case of an individual Applicant pursuant to paragraph 118-37(1)(b) of the ITAA 1997?

Answer:

Yes.

Each Applicant will be entitled or obliged to disregard any capital gain or capital loss pursuant to paragraph 118-37(1)(b) of the ITAA 1997.

Detailed reasoning

For detailed reasoning with respect to the application of paragraph 118-37(1)(b) of the ITAA 1997, see the discussion in response to Questions 18, 19 and 20, above.

Question 25:

Is an Applicant's interest in the Agreement a separate CGT asset, the disposal of which might result in a capital gain?

Answer:

Yes.

Contractual rights can constitute a CGT asset, the disposal of which might result in a capital gain or capital loss.

Detailed reasoning

Whilst the co-owned policies will reflect the legal interests of the Applicants, the terms of the Agreement reflect the Applicants' beneficial interests in the rights under the co-owned policies. Each Applicant's interest in the rights under the co-owned policy is a separate CGT asset for the purposes of section 100-25 of the ITAA 1997.

Any amounts received by the beneficial owner of interests in a co-owned policy are derived by virtue of their equitable ownership of rights under the co-owned policy and not because of their interest in the Agreement. The Agreement specifies the rights and obligations of the parties to the Agreement in respect of their interests in the co-owned policies. Accordingly, any insurance proceeds which are receivable by the beneficial owner are so receivable by reason of their equitable ownership of interests in the relevant policy, not because of their rights under the Agreement.

Therefore, any insurance proceeds received by an Applicant will not constitute capital proceeds for a CGT event that happens to their contractual rights in the Agreement; rather, they will constitute capital proceeds for a CGT event that happens to the Applicant's interest in rights under a co-owned policy.

The potential CGT events which may happen to an Applicant's interests in the Agreement are outside the scope of this ruling.

Question 26:

Is any capital gain arising from the proceeds payable under the terms of the Agreement disregarded in accordance with paragraph 118-37(1)(b) of the ITAA 1997?

Answer:

No.

Detailed reasoning

Question 27:

Is any capital gain arising from the proceeds payable under the terms of the Agreement disregarded in accordance with item 3 of the table in subsection 118-300(1) of the ITAA 1997?

Answer:

No.

Detailed reasoning

Question 28:

Does the statement in section 106-5 of the ITAA 1997 that the capital gain of a partnership (ie, with respect to the policy) is made by the Partners individually mean that the Applicants individually are deemed to have disposed of their interest in a co-owned policy?

Answer:

No.

Question 29:

Answer

No.

Detailed reasoning

As such, there is no requirement to apply the 'underlying asset approach' as discussed in paragraph 23 of TD 2008/22.

Question 30:

Answer:

Yes.

Detailed reasoning

Question 31:

Answer:

Yes.

Detailed reasoning

Question 32:

Does the definition of the beneficial interest of the Applicant in the Agreement define the beneficial ownership of the death benefit under a co-owned policy?

Answer:

Yes.

Whilst the co-owned policies will reflect the legal interests of the Applicants, the terms of the Agreement reflect the Applicants' beneficial interests in the rights under the co-owned policies.

Question 33:

Does the definition of the beneficial interest of the Applicant in the Agreement define the beneficial ownership of the non-death benefit under a co-owned policy?

Answer:

Yes.

Whilst the co-owned policies will reflect the legal interests of the Applicants, the terms of the Agreement reflect the Applicants' beneficial interests in the rights under the co-owned policies.

Question 34:

Answer:

Yes, as discussed in response to Question 10, above.

Detailed reasoning

As discussed in response to Question 10, above, the conduct of the Applicants results in a trust relationship.

Question 35:

Answer

No.

A non-death benefit is paid by an Insurer in satisfaction of their obligations under a co-owned policy and not under the Agreement.

Detailed reasoning

Question 36:

Answer:

No.

A non-death benefit is paid by an Insurer in satisfaction of their obligations under a co-owned policy and not under the Agreement.

Detailed reasoning

Question 37:

Not applicable.

We formed our view on the facts by relying on this information

Your application for a private ruling and further correspondence with the ATO in relation to your private ruling application

Draft 'Agreement' provided to the Commissioner of Taxation for the purposes of making this Ruling

The current PDS for each Insurer

ATO view documents

Taxation Determination TD 2007/4 Income tax: capital gains tax: is a 'policy of insurance on the life of an individual' in section 118-300 of the Income tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression?

Taxation Determination TD 2008/22 Income tax: capital gains: does CGT event C2 happen as a result of the satisfaction of an investor's rights under a Deferred Purchase Agreement warrant, an investment product offered by financial institutions, by the delivery of the Delivery Assets?

Taxation Determination TD 94/31 Income tax: capital gains: what is meant by the term "original beneficial owner" as used in subsection 160ZZI(3) of the Income Tax Assessment Act 1936 (the Act)?

Other references (non ATO view, such as court cases)

FCT v Everett 78 ATC 4595

Norman v FCT (1963) 109 CLR 9

Pallette Shoes Pty Ltd (in liq) v Krohn (1937) 58 CLR 1

X v Australian Prudential Regulation Authority (2007) 226 CLR 63

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