Edited version of your written advice

Authorisation Number: 1012872859842

Date of advice: 28 September 2015

Ruling

Subject: Foreign life insurance policy

Question and answer

Are you assessable in respect of a reversionary bonus received when a life insurance Policy matures, is forfeited or surrendered after 10 years from commencement of risk?

No

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

The Policy:

• is currently owned by the The Trust

• was taken out by the original policy holders.

Ownership of the policy was transferred to you (The Trust) for no consideration.

The Trust has from inception been a tax resident of Australia and has at all times had its central management and control in Australia.

The original policy owners remain the sole persons insured under the policy.

You advise that the policy was issued by a non-resident insurer, which is not authorised to carry on life insurance business in Australia.

The currency of The Policy is not AUD.

You advise that under the Policy, you are able to make contributions in the form of premiums of a specified sum or increased premiums at any time.

As of the date of this ruling, five contributions have been in the form of premiums:

During the time that the policy was held, a nominal allocation totalling $X was made available for redraw by the policy holders if required. The allocation was never drawn down by you and no costs or interest charges have been incurred.

You have no intention of redeeming or otherwise surrendering The Policy within 10 years of the date of commencement of risk.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 118-300.

Income Tax Assessment Act 1936 Section 26AH.

Reasons for decision

Assessability of amounts that accrue in foreign life policy

Section 6-5 of the ITAA 1997 states that assessable income consists of both ordinary income and statutory income. However, an amount of ordinary or statutory income will not be assessable income if the amount is made exempt or is otherwise excluded from assessable income. In working out whether you have derived an amount of ordinary income, and if so when you derived it, section 6-5 of the ITAA 1997 states that you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

In your case, you invested in a foreign life policy. The amounts that accrue in your foreign life policy result in changes in the value of the policy.

As the amounts that accrue are not received by you or dealt with on your behalf, you have not actually received these amounts as income. Therefore, the amounts that accrue annually in your foreign life policy are not assessable as ordinary income in Australia.

Furthermore, there are no provisions in the capital gains tax legislation that would operate to include these amounts as assessable capital gains.

Therefore, the amounts that accrue annually in your foreign life policy are not assessable as ordinary or statutory income in Australia.

Assessability of reversionary bonuses

The proceeds received from the maturity of your foreign life policy are classed as a reversionary bonus. A reversionary bonus paid under a short term life policy on maturity, forfeiture or surrendered taken out after 28 August 1982 is subject to special tax treatment if the risk commenced after 7 December 1983 under section 26AH of the ITAA 1936. Subsection 26AH(2) of the ITAA 1936 states that if a reversionary bonus is received after 10 years from commencement of a life insurance policy, that the bonus received is not assessable. Subsection 26AH(13) of the ITAA 1936 states that the 10 year period is reset if the premiums in one year exceed the premiums in the previous year by more than 25%.

CGT exemption for the cancellation, surrender or ending of an insurance policy

CGT is the tax you pay on certain gains you make. Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss as a result of a CGT event happening to an asset in which you have an ownership interest. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property; or a legal or equitable right that is not property.

Section 118-300 of the ITAA 1997 excludes from the application of CGT provisions certain capital gains or capital losses relating to the taxpayer's interests under insurance policies, in specified circumstances.

A capital gain or loss from a relevant CGT event (cancellation, surrender and similar endings) happening in relation to a taxpayer's interest in rights under a life insurance policy or an annuity instrument is disregarded if either:

• the taxpayer is the original beneficial owner of the policy or instrument

• if not, the taxpayer acquired for no consideration the interest in the policy

• the taxpayer is the trustee of a complying superannuation

In your case, your foreign life policy will be taken out after 28 August 1982 and will be held for more than 10 years from the date of risk commencement which was dd/mm/yyyy. Therefore, the conditions of section 26AH of the ITAAA 1936 have been met and the reversionary bonus received from the maturity of the policy is not assessable income.

You acquired the policy for no consideration.

Therefore no amount is included as a reversionary bonus or as a capital gain on ending the policy.