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Edited version of your written advice
Authorisation Number: 1012872635668
Date of advice: 3 September 2015
Ruling
Subject: Taxation on Surrender of your Life Insurance Policy
Question
Are the proceeds from the surrender of your life insurance policy included in your assessable income?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2016
The scheme commenced on
1 July 2015
Relevant facts
You took out a whole of life insurance policy more than ten years ago.
You have paid regular periodic premiums toward the policy.
You intend to surrender the policy.
When you surrender the policy you will receive a lump sum payment, including 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 15-75
Income Tax Assessment Act 1936 Section 26AH
Reasons for decision
Your assessable income includes ordinary income and statutory income from all sources (sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).
Ordinary income
Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997). Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property, and income from carrying on a business.
Other characteristics of income that have evolved from case law included receipts that:
• are earned
• are expected
• are relied upon, and
• have an element of periodicity, recurrence or regularity.
The lump sum amount received on surrender of a life insurance policy does not have the characteristics of ordinary income and is therefore not ordinary income.
Statutory income
Section 6-10 of the ITAA 1997 also includes in a taxpayer's assessable income amounts that are not ordinary income but are made assessable under another provision; these amounts are statutory income.
Bonuses received on the surrender of a life policy may be assessable as statutory income under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936).
Where it is more than 10 years from the commencement of the life policy, the bonuses received on maturity of the policy are not considered to be statutory income as they do not fall within the operation of section 26AH of the ITAA 1936 (paragraph 3 of IT 2504).
The lump sum amount received on the surrender of your life insurance policy is not assessable under section 26AH of the ITAA 1936 as the policy commenced more than 10 years ago.
Capital gains tax
The capital gains tax (CGT) provisions operate in certain circumstances when there is a disposal of an asset. However, the CGT provisions have no application where a life insurance policy is disposed of by the original individual owner of the policy (section 118-300 of the ITAA 1997).
Conclusion
The lump sum payment you will receive on surrender of your life insurance policy is not assessable income as it is neither ordinary income nor statutory income. Therefore, you do not have to pay tax on the proceeds and it does not need to be included in your 2015-16 tax return.