Edited version of your private ruling

Authorisation Number: 1012446288619

Ruling

Subject: Foreign Life Assurance

Question and Answers

Is your assessment on the bonus amount you will receive from a life assurance policy that you took out overseas?

Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You became a resident of Australia.

You purchased life assurance bonds overseas about X years ago.

You have held the bond for less than 7 years.

You were allowed to cancel, surrender, redeem or have the terms of the policy altered after 1 July 19YY

If the bond is not withdrawn, it becomes payable on death.

If you cash in your Bonds you will get back the value of your units, less any deductions.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 26(i)

Income Tax Assessment Act 1936section 26AH

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included:

· income according to ordinary concepts; that is, ordinary income (section 6-5 of the ITAA 1997), or

· an amount which is included by a specific provision about assessable income; that is, statutory income (section 6-10 of the ITAA 1997).

Taxation Ruling IT 2504 provides the Commissioner's views on bonuses received from life assurance. It states at paragraph 2:

Bonuses received on a policy of life assurance are not income according to ordinary concepts and therefore do not constitute assessable income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

As the bonus will not be ordinary income, it will only be included in your assessable income if it is statutory income.

Section 26AH of the ITAA 1936 includes in assessable income certain bonuses received under short term life insurance policies taken out after 27 August 1982, referred to as 'eligible policies'. As your policy commenced after that date, it is assessed under that provision.

A bonus is a reversionary bonus when the entitlement to an amount accrues upon maturity of the policy and is not payable annually. You will receive a final bonus on maturity of your policy. The final bonus you will receive will be considered to be a reversionary bonus. This is the relevant amount for assessment.

Section 26AH of the ITAA 1936 provides for the taxation of certain reversionary bonuses received under a relevant life assurance policy (an eligible policy) during a specified period (the eligible period).

Taxation Ruling IT 2346 discusses the application of section 26AH of the ITAA 1936 to short-term life assurance policies. An eligible policy is defined to mean a policy of life assurance in relation to which the date of commencement of risk is after 27 August 1982.

The relevant amount under policies where the date of commencement is after 27 August 1982 are:

· fully assessable if received during the first 8 years; or

· two-third assessable if received during the first 9 years; or

· not assessable under section 26AH of the ITAA 1936 if the policy has been held for a minimum of 10 years. 

Your policy commenced after 27 August 1982, you have held them for a period of less than 10 years. Accordingly, the relevant amount paid to you on maturity is included in your assessable income as bonuses from life insurance companies and friendly societies.