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Ruling

Subject: Assessable income

Question:

Are the proceeds from your cancelled life insurance policy included in your assessable income?

Answer:

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You commenced a life insurance plan more than fifteen years ago.

Your plan is a non-superannuation policy.

You cancelled the plan.

You contributed premiums annually.

You did not increase the premium amount at any time during the term of the policy.

You received a payout.

You have provided a copy of the insurance policy.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 26AH,

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-15

Income Tax Assessment Act 1997 Section 118-300.

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia during the income year.

Lump sum proceeds received on life assurance or endowment policies are not income according to ordinary concepts as they do not have the characteristics or ordinary income. The Courts have held that these lump sum proceeds are of a capital nature.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions about assessable income.

One such provision is section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) which specifies that the assessable income of a taxpayer shall include revisionary bonuses paid on maturity, forfeiture or surrender of an eligible policy. A revisionary bonus is one where the entitlement to the bonus only accrues upon the maturity, forfeiture or surrender of the policy.

An 'eligible policy' is defined as a policy of life assurance with a commencement risk date after 27 August 1982.

Taxation Ruling IT 2346 discusses the circumstances under which bonuses paid on certain life assurance policies are assessable. This ruling states that section 26AH may apply to amounts received under any form of life assurance policies, including those known as unbundled policies which are categorised as investment account or investment linked policies.

IT 2346 explains that the taxation treatment of the bonuses paid on policies depends on the date of commencement of the risk.

· if the policy or risk commenced prior to 28 August 1982, the bonuses are tax-free to the recipient.

· if the policy or risk commenced after 27 August 1982 and on or before 7 December 1983, bonuses paid are tax free where the policy has been held for four years.

· if the policy or risk commenced after 7 December 1983 the bonuses are tax-free to the recipient where the policy has been held for 10 years or more.

In your case, you held an eligible policy for the purposes of section 26AH of the ITAA 1936. As the policy commenced after 27 August 1982 and was held for more than ten years and you did not increase the premiums by 25% in any year any bonuses received on the cancellation or surrender of the policy are not assessable as income.

Section 118-300 of the ITAA 1997 excludes from the application of the capital gains tax (CGT) provisions certain capital gains or capital losses relating to the taxpayer's interests under insurance policies, in specified circumstances.

The CGT exemption applies to capital gains or losses from a CGT event relating to rights under life insurance policies or annuity instruments, if the taxpayer is the original beneficial owner of the policy.

The term original beneficial owner is not defined and has no accepted meaning in trust law. In Taxation Determination TD 94/31 the original beneficial owner is regarded as the first person who, at the time the policy is effected, holds the rights and possesses all the normal incidents of beneficial ownership.

In your case, you were the original beneficial owner of the policy. Any capital gain or loss resulting from the surrender of your life assurance policy will be disregarded in accordance with section 118-300 of the ITAA 1997.

Therefore you do not include proceeds from the cancellation of your life insurance policy in your assessable income.