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Edited version of your written advice
Authorisation Number: 1012786265510
Ruling
Subject: foreign life assurance policy
Questions and answers
Will any payment from the surrender of your life assurance policy be subject to tax in Australia?
No
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
Your client received an amount from a foreign life assurance bond.
The policies commenced prior to 1992 and were held for more than 10 years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1936 Section 26AH
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines what income is included in the assessable income of a person who is required to pay tax in Australia. For a resident of Australia, that provision states that all income, whether derived from within Australia or outside is included in their assessable income. Therefore, the worldwide income of a person residing in Australia is subject to tax in Australia.
Generally, the Australian laws on taxation of life assurance bonuses apply equally to Australian and overseas policies. This is so because the definition of a life assurance policy is the same as the definition of "life policy" used in the Life Insurance Act 1995.
A reversionary bonus is a bonus paid only on termination of the policy ((12 CTBR (NS) 189 Case 34; Case Q74 (1965) 15 TBRD 346 ). While an estimate of the value of the accrued reversionary bonus may be made each year, it does not accrue to the credit of the policy owner at that time. Therefore, the policyholder does not become entitled to the bonus or receive it until the policy is terminated.
Reversionary bonuses paid on the termination of life insurance policies are included in the assessable income, by section 26AH of the ITAA 1936. However, where the life insurance policy in question was taken out before 27 August 1982, or where the policy was held for at least ten years, no part of the reversionary bonus is included in the assessable income.
Where the total value of an Australian resident's interests in foreign companies, trusts, and life assurance policies exceeds $50,000, income that accrues to the Australian resident in those investments is subject to tax in Australia, even where the income has not yet been received. However, foreign life assurance policies that were taken out before 1 July 1992, are not subject to these rules.
Conclusion.
As your income received from your life assurance bonds is a reversionary bonus you are not liable to tax on the income as it has been held for more than 10 years.