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Edited version of your written advice
Authorisation Number: 1013027064743
Date of advice: 1 June 2016
Ruling
Subject: Life insurance bonus
Question
Is the bonus from your life insurance policy included in your assessable income?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2016
The scheme commenced on
1 July 2015
Relevant facts
You are an Australian resident for tax purposes.
A few years ago, when living overseas, you invested in a Life Insurance policy.
You were later advised by the insurer that your policy was to be terminated early and within 8 years of commencement.
On termination, a bonus above the premiums paid was received by you.
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
Detailed reasoning
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Ordinary income has generally been held to include three 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 include receipts that:
• are earned,
• are expected,
• are relied upon, and
• have an element of periodicity, recurrence or regularity.
A lump sum payment received from the termination of a life insurance policy does not relate to personal services, property, or the carrying on of a business. The payment is a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the investment in insurance, rather than from a relationship within which personal services are performed. Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income, and are also included in assessable income.
Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in assessable income certain reversionary bonuses received in respect of life insurance policies where the date of commencement is after 27 August 1982. A reversionary bonus is one paid on maturity, forfeiture or surrender of a life insurance policy.
Your policy commenced after 27 August 1982 and your bonus is regarded as a reversionary bonus, therefore section 26AH of the ITAA 1936 applies. Your bonus was received during the first eight years from the date of commencement of risk, and the full amount is assessable as outlined in subsection 26AH(6) of the ITAA 1936.
As the bonus received on the termination of your life insurance policy is assessable income, you need to include the amount on your tax return.