Edited version of your written advice

Authorisation Number: 1012913798537

Date of advice: 20 November 2015

Ruling

Subject: Income - assessable - life insurance

Question

Is the payment that you received upon withdrawal from your life insurance policy assessable income?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You commenced a life insurance policy prior to 27 August 1982. You paid an annual premium over the life of the policy.

The policy was not due to end for a number of years.

You withdrew from the policy in the 2014-15 financial year. You received a lump sum payment from your insurer.

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 118-300

Income Tax Assessment Act 1936 Section 26AH

Reasons for decision

Subsection 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 6-10 of the ITAA 1997 includes in assessable income amounts that are not ordinary income but are included in assessable income by another provision; these amounts are statutory income.

Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a taxpayer's assessable income shall include bonuses, and some other amounts in the nature of bonuses, received under a relevant life assurance policy that is an eligible policy during a specified period which is the eligible period.

Eligible policy is defined in subsection 26AH(1) of the ITAA 1936 to mean a policy of life assurance in relation to which the date of commencement of risk is after 27 August 1982.

Subsection 26AH(6) of the ITAA 1936 states that for policies where the risk commenced after 7 December 1983, and the taxpayer receives an amount under the policy as or by way of a bonus, the assessable income of the taxpayer of the year of income in which the bonus was received shall include :

(a)    if the amount is received within the first 8 years of the eligible period an amount equal to the amount received

(b)   if the amount is received during the ninth year of the eligible period an amount equal to two thirds of the relevant amount or

(c)    if the amount is received during the tenth year of the eligible period an amount equal to one third of the relevant amount.

If the amount is received after the tenth year from the date of commencement of risk, then the amount is not included in the taxpayer's assessable income.

In your case, your policy commenced prior to 27 August 1982. The policy is therefore not an eligible policy and the payment received will not be assessable income under section 26AH of the ITAA 1936.

Capital Gains Tax (CGT) implications

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

The CGT exemption applies to capital gains or losses from a CGT event relating to rights under life insurance policies or annuity instruments, if the taxpayer is the original beneficial owner of the policy.

The term original beneficial owner is not defined and has no accepted legal meaning in trust law. In Taxation Determination TD 94/31 the original beneficial owner is regarded as the first person who, at the time the policy is effected, holds the rights and possesses all the normal incidents of beneficial ownership.

As you are the original beneficial owner of the policy, any capital gain or loss resulting on the surrender of your life assurance policy will be disregarded in accordance with section 118-300 of the ITAA 1997.

Therefore, the payment you received upon surrender of your life insurance policy is not assessable under any section of the relevant Acts.