Edited version of your private ruling

Authorisation Number: 1012450120804

Ruling

Subject: GST and the Sale of Interests in Life Policies

Is the supply of the interests in the life policies by the supplier a GST-free supply that is made in relation to rights that are for use outside of Australia under Item 4 of the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, the supply of the interests in the life policies by the supplier is a GST-free supply.

Question 2

Is the supply of the interests in the life policies by the supplier input taxed under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No, the supply of the interests in the life policies by the supplier is not input taxed, it is GST-free.

Relevant facts and circumstances

The supplier was the owner and beneficiary of a number of specified life insurance policies. The life policies were issued by insurers located in another country and were 'whole of life' policies over residents of that country. The interests in the life policies were held by a third party in a custodial role.

A sale agreement was entered into by the supplier and the purchaser. Essentially, the sale agreement resulted in the purchaser becoming the beneficial owner of the life policies. The custodian of the policies remained the same.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 38-190.

A New Tax System (Goods and Services Tax) Act 1999 section 40-5.

A New Tax System (Goods and Services Tax) Regulations 1999 regulation 40-5.09.

Reasons for decision

Question 1

The table in subsection 38-190(1) of the GST Act provides a list of types of supplies that are GST-free. Item 4 in the table states that a 'supply that is made in relation to rights' is GST-free if 'the rights are for use outside of Australia' or 'the supply is to an entity that is not an Australian resident and is outside of Australia when the thing supplied is done.

The sale agreement provides that the supplier will sell, assign, transfer and grant to the purchaser, all of the supplier's interests with respect to each of the life policies. The contract is worded to ensure that any and all rights available to the supplier, under the policies, is transferred to the purchaser.

Concurrently with the sale of the interests in the life policies, the supplier will also instruct the custodian to transfer the policies and any proceeds to the purchaser's account.

The specific rights that attach to the life policies generally consist of:

· a right to receive a payment upon the death of the insured (ie death benefit);

· a right to 'security entitlement' in 'financial assets' comprising each policy and proceeds thereof;

· a right to obtain death certificates;

· a right to release policy information;

· a right to name a new beneficiary; and

· any other claims, options, privileges, rights, title and interest in, to and under each policy.

Even though the supplier supplies a bundle of rights, the substance of what is supplied is the right to receive proceeds on maturity of a life policy. That is, the right to receive payment of the death benefit is the dominant part and essence of the right. All other rights are integral, ancillary or incidental to this dominant part. These other rights do not have an aim in themselves and they merely aid in the process of receiving the proceeds on maturity of a life policy.

The subject of the sale agreement is the sale, transfer, assignment and grant of the entitlement to receive the death benefit payment payable to the beneficiary under the life policies. Paragraph 65 of Goods and Services Tax Ruling, Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2) (GSTR 2003/8) explains that a supply is 'made in relation to rights' where the 'essential character or substance of the supply, or the dominant part of a composite supply, is one of rights'.

Therefore, the supply made under the sale agreement is made in relation to rights for the purposes of paragraph (a) of item 4 in the table in subsection 38-190(1) of the GST Act. However, the supply is GST-free under section 38-190 of the GST Act only if the rights are 'for use outside of Australia'.

Paragraph 108A of GSTR 2003/8 explains that 'it is the intended use of those rights that determines if the supply that is made in relation to the rights falls within item 4'. By purchasing the interests in the life policies under the sale agreement, the purchaser becomes entitled to receive the proceeds of the policies upon their maturity. The intended use by the purchaser of the rights it holds in relation to the life policies may be described as 'the right to receive the future payments of the death benefits under the life policies'.

ATO Interpretative Decision, Goods and Services Tax: GST and brokerage services for foreign shares listed overseas (ATO ID 2012/1) discusses the rights attached to shares and whether those rights are 'for use outside of Australia' in the context of determining whether the supply of the brokerage services provided to facilitate the purchase of the shares is GST-free under item 4 in the table in subsection 38-190(1) of the GST Act. In that context, if the shares are in a company that is incorporated outside of Australia and the shares are listed on a stock exchange outside of Australia, then the rights attached to the shares are for use outside of Australia, even if the shareholder is located within Australia. The principles used in ATO ID 2012/1 to form that view include the principle that the rights are not enforceable in Australia (or that an Australian court is unlikely to claim jurisdiction). This is because, in the context of exchanges located within the other country, the shares are required to be physically held in the other country (by a securities intermediary if the shareholder is not located in the other country).

The life policies from which the rights are derived in this case, are policies offered by insurers located in the other country and provided over residents of the other country. Upon maturity, the insurers pay the death benefit to the custodian which is also located in the other country. The insurers and policies are governed by relevant federal and state laws of the other country and any dispute in relation to enforcement of the rights inherent in the relevant life policies would need to be raised through the relevant court system in that country.

Therefore, the rights attached to the life policies that are the subject of the sale agreement are 'for use outside of Australia' and the supplier (and subsequently, the purchaser) only receives the funds arising from the death benefits when they have been paid to its custodian in the other country.

Paragraph 118 of GSTR 2003/8 states:

'A supply of insurance is for use where coverage of the risk is located. The insured has a right to be indemnified or a right to payment of a specified sum if the insured event occurs. The fact that a claim may be made in a particular place following the occurrence of an event, or that a claim must be made on the insurer in a particular place, does not mean that the right is for use in that place….'

The example from paragraph 119 to 121 of GSTR 2003/8 demonstrates where a contract of insurance provides coverage that is outside of Australia. However, the supply which is the subject of the sale agreement is not one of insurance. The supply of insurance was made by the insurers located in the other country when the life policy was first taken out over the other country's resident. The supply made by the supplier under the sale agreement is the supply of rights that it has under those policies rather than the insurance itself. Therefore, the discussion of insurance in GSTR 2003/8 does not apply to the supply made by the supplier.

Consequently, the supply made by the supplier to the purchaser under the sale agreement is made 'in relation to rights that are for use outside of Australia' and is GST-free under paragraph (a) of item 4 in the table in subsection 38-190(1) of the GST Act.

Question 2

The supply of a financial interest that satisfies the requirements under subregulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) is input taxed under section 40-5 of the GST Act. Subregulation 40-5.09(1) of the GST Regulations states:

(1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

(a) the provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with Australia; and

(b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to supply of the interest.

The table in subregulation 40-5.09(3) of the GST Regulations lists a number of interests for the purpose of subregulation 40-5.09(1). Item 6 within the table is of relevance. It states:

Life insurance business to which subsection 9(1) of the Life Insurance Act 1995, or a declaration under subsection 12(2) or section 12A of that Act, applies, or related reinsurance business

Accordingly, subject to the conditions in subregulation 40-5.09(1) of the GST Regulations being met, supplies made in relation to life insurance are financial supplies.

As the life insurance policies are provided by insurers located in the other country, supplies of insurance would not be made by a life insurance business to which the Life Insurance Act applies. Therefore, the supplies of the interests in the policies made by the supplier are not covered by item 6 in subregulation 40-5.09(3) of the GST Regulations.

However, item 2 in the table in subregulation 40-5.09(3) of the GST Regulations provides that the provision, acquisition or disposal of an interest in or under a debt may be a financial supply.

Paragraph 20 of Goods and Services Tax Ruling, Goods and services tax: assignment of payment streams including under a typical securitisation arrangement (GSTR 2004/4) states:

20. Regulation 40-5.02 provides that an interest in relation to a financial supply is anything that is recognised at law or in equity as property in any form. Relevant examples of an interest include a debt or right to credit and a right to future property. The term interest is therefore given its broadest meaning so that an interest is as wide as the legal and equitable concept of property, including rights under a contract.

Paragraphs 23 and 24 of GSTR 2004/4 explain that a debt is a 'chose in action' and that the assignment of a debt, for GST purposes, comes within the meaning of 'disposal'. The payments payable by the foreign Insurers upon the death of an insured are payment streams. This is distinguished from the underlying property interests which are the insurance policies. Although the payments are not payable until a future date, paragraphs 29 and 30 of GSTR 2004/4 explain that the assignment of a future payment stream is still the supply of an interest in a debt:

29. Until such time as the right has crystallised, the interest of an assignee of future property for valuable consideration is more than merely contractual. Equity regards the assignee as having a prospective interest in the property to be acquired which has some of the incidents of a proprietary right. It is an interest for the purposes of the GST regulations which includes rights under a contract.

30. Provided there has been an effective legal or equitable assignment of a right to all or part of a payment stream, or an agreement to assign the right to a payment stream that arises in the future there will be the supply of an interest in or under a debt. This is a financial supply under item 2 of subregulation 40-5.09(3) provided the requirements of subregulation 40-5.09(1) are also satisfied.

The sale agreement provides that the purchaser will purchase from the supplier all of its interests with respect to each of the specified policies. This is an effective assignment of the payment stream arising from the underlying life insurance policies.

The consideration for the sale acquisition of the interests in the life policies is money calculated under the sale agreement with reference to the value of the policies. Goods and Services Tax Ruling, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) explains that the consideration for the acquisition-supply is the consideration provided for the supply.

35. Consideration for a financial interest is something given for the provision, acquisition or disposal of the financial interest. Part of what is given as consideration may include promises made, or rights granted, under a contract. In the context of financial supplies, the payment received is consideration for the provision or disposal of the financial interest and the payment made is consideration for the acquisition of the financial interest. Where consideration is given for the 'first' supply, there is no need to identify consideration specific to the acquisition-supply (the 'second' supply), as the acquisition will have been made for consideration. Where the financial supply has been made 'for consideration', the acquisition-supply will also be 'for consideration'.

The acquisition of the interests in the life policies is made in the course of the enterprise carried on by the supplier and the assignment of the payment streams occurred within Australia and is therefore, connected with Australia. Therefore, the supplier is making a supply of the payment streams which arise from the interests in the life policies under the sale agreement that is a financial supply.

However, subsection 9-30(3) of the GST Act states

(3) To the extent that a supply would, apart from this subsection, be both GST-free and input taxed:

(a) the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed; or

(b) …

As the supply of the interests made under the sale agreement is both input taxed and GST-free, subsection 9-30(3) of the GST Act deems the supply to be GST-free and not input taxed.