Edited version of your private ruling

Authorisation Number: 1012599147870

Ruling

Subject: Assessability of insurance policy proceeds

Question

Is any part of the proceeds of a whole of life with profit insurance policy held by the self managed superannuation fund to be included in the assessable income of the fund?

Answer

No. However the proceeds of the whole of life with profit insurance policy will be a superannuation benefit when it is paid to the member (provided the fund member satisfies the relevant condition of release of benefits when the benefit is paid) and may be assessable depending on the age of the member at the time the superannuation benefit is received.

This ruling applies for the following period:

2012-13 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Fund is a self managed superannuation fund. The trustee of the Fund is the Corporate Trustee.

The Fund commenced a whole of life with profit insurance policy (the Policy) several years ago with a life insurance company.

The Fund is the owner of the Policy.

The life insured for the Policy is the sole member of the fund. The Fund member is also the director of the Corporate Trustee.

The Fund paid an annual regular premium each year until the Policy was cashed in during the 2012-13 income year. The cash withdrawal amount includes declared reversionary bonuses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1997 Section 301-10.

Income Tax Assessment Act 1936 Section 26AH.

Income Tax Assessment Act 1936 Subsection 26AH(6).

Income Tax Assessment Act 1936 Subsection 26AH(7).

Reasons for decision

Summary

The Fund will not be assessed on the proceeds of the Policy. However, when the Fund member satisfies the relevant condition of release of benefits, the superannuation benefit (which would include the proceeds of the Policy) may be assessed to the member when it is paid to the member.

Detailed reasoning

Bonuses and reversionary bonuses

The terms 'bonus' and 'reversionary bonus' are not defined in either the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997). Nor are they defined in the Life Insurance Act 1995. In life insurance terms, a bonus is a dividend paid by the insurer out of surplus life insurance profits and distributed on a pro rata basis to the policyholders as an addition to the sum insured. A bonus may be paid on a whole-of-life policy or on an endowment policy.

In the case of a reversionary bonus, the bonus is added to the sum insured (that is, it is not paid until the sum insured becomes payable). A non-reversionary bonus is effectively a bonus that is actually paid (that is, it is accrued by adding it to the sum insured). A non-reversionary bonus can therefore be described as a cash bonus.

Reversionary bonuses

Subsection 26AH(6) of the ITAA 1936 includes all or part of a reversionary bonus received on a life assurance policy in the assessable income of the recipient.

As noted above, a reversionary bonus is one where the entitlement to the bonus only accrues upon the maturity, forfeiture or surrender of the policy. In a life insurance context, the proceeds of a policy that incorporates such a bonus would not be income according to ordinary concepts. Any amount received as a bonus on a life insurance policy other than a reversionary bonus is included in assessable income under section 15-75 of the ITAA 1997.

Section 26AH of the ITAA 1936 supplements section 15-75 of the ITAA 1997, as it is intended to prevent taxpayers from taking out short-term life insurance policies for the purpose of making tax-free gains in the form of reversionary bonuses.

Subsection 26AH(6) of the ITAA 1936 operates to:

(a) include in full as assessable income bonuses received within the first eight years of the eligible period;

(b) include as assessable income two-thirds of bonuses received in the ninth year of the eligible period;

(c) include as assessable income one-third of bonuses received in the tenth year of the eligible period; and

(d) exclude from assessable income bonuses received after the tenth year of the eligible period.

Subsection 26AH(1) defines 'eligible period' as follows:

eligible period, in relation to an eligible policy, means the period of 10 years commencing on the date of commencement of risk of the policy.

However, where the policyholder is the trustee of a complying superannuation fund, subsection 26AH(7) of the ITAA 1936 operates to exclude the bonus from assessable income.

Non-reversionary bonuses

Certain amounts are excluded from the assessable income of a superannuation entity (which includes a complying superannuation fund) under section 295-335 of the ITAA 1997. Under Item 1 of the table in section 295-335 the assessable income of a complying superannuation fund does not include a bonus on a life insurance policy (except a reversionary bonus).

In other words, a non-reversionary bonus paid by a life insurance company to a complying superannuation fund is not assessable income of the complying superannuation fund.

Life insurance companies are subject to tax on their complying superannuation fund business under Division 320 of the ITAA 1997. The taxable income of a life insurance company's superannuation business is taxed at a rate of 15%, which is the same rate of tax that applies to complying superannuation funds.

Were a policyholder, which was the trustee of a complying superannuation fund, required to include distributions of non-reversionary life insurance bonuses as assessable income, there would effectively be double taxation on that income. Accordingly, Item 1 of the table in section 295-335 of the ITAA 1997 excludes non-reversionary bonuses from the assessable income of the complying superannuation fund.

Tax treatment of insurance payment to the Fund

In the present case the Fund held a Policy with a life insurance company. The life insured was a member of the Fund and director of the Corporate Trustee. The policy is an eligible policy as the commencement of risk occurred after 27 August 1982.

As noted above, any reversionary bonuses would be excluded from the assessable income of the Fund under subsection 26AH(7) of the ITAA 1936. Similarly, any non-reversionary bonuses would also be excluded from the assessable income of the Fund under section 295-335 of the ITAA 1997.

It should be noted that although the proceeds of the Policy are not assessable to the Fund, the superannuation benefit (which would include the proceeds of the Policy) may be assessable to the member when it is paid to the member once the necessary condition for the release of the member benefit has been met.

Tax treatment of subsequent superannuation benefit

The tax treatment of a superannuation benefit depends on the age of the person at the time the superannuation benefit is received and, for persons under 60 years of age, whether or not the person has reached their preservation age.

Preservation age is the age at which retirees can access their superannuation benefits. For a person born before 1 July 1960 their preservation age is 55 years.

If the member has reached age 60 when he or she receives the superannuation benefit, the benefit is not assessable income and is not exempt income in accordance with section 301-10 of the ITAA 1997.

However, it should be noted that the fund member must satisfy a condition of release of benefits as specified in the Superannuation Industry (Supervision) Regulations 1994, to enable the Fund to cash the benefit.

Therefore, provided the fund member satisfies the relevant condition of release of benefits when the benefit is paid, the superannuation lump sum payment will be non-assessable income and non-exempt income under section 301-10 of the ITAA 1997 if the fund member is 60 years or over at the time the benefit is received.

Conclusion:

The proceeds of the whole of life with profit insurance policy held by the self managed superannuation fund is not included in the assessable income of the Fund. The proceeds of the whole of life with profit insurance policy will be a superannuation benefit when it is paid to the member of the fund and may be assessable in the hands of the member depending on the member's age at the time of receipt.