Edited version of your written advice

Authorisation Number: 1012884361359

Date of advice: 24 September 2015

Ruling

Subject: Foreign life insurance

Questions and answers

Are you subject to income tax as a consequence of transferring a life insurance policy to a trust in the financial year ended 30 June 2015.

No.

Are you subject to tax in respect of a reversionary bonus received under a life insurance policy where the policy matures or is otherwise forfeited or surrendered more than 10 years after the date of 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 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

For many years you were a non-resident of Australia for tax purposes.

You returned to Australia and resumed your Australian tax residence in 20XX.

When you were a non-resident you invested in an insurance bond which you indicate is a foreign life insurance policy, this will be referred to as The Policy.

You and another individual were the original owners and the sole persons insured under the Policy.

Ownership of the policy was transferred to a Family Trust (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 taxpayers 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, you have made five contributions in the form of premiums:

During the time that the policy was held, a nominal allocation was made available for redraw by the Taxpayers if required. The allocation was never drawn down by the Taxpayers 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.

You have stated the date of commence of risk is in 20XX.

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.

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

Disposal by the Original beneficial owners

Where two or more persons jointly effect a policy of life insurance, each person may be an original beneficial owner. An original beneficial owner may be an individual, a company or a trustee of a trust estate alone or in partnership.

You were the original beneficial owners and transferred your interests in the policy to the trust for no consideration.

Therefore, there are no CGT consequences for you on the transfer to the trust.

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%.

As the new policy holder will receive the bonuses you are not assessable on any bonus paid on the policy.