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Edited version of your written advice
Authorisation Number: 1013084121807
Date of advice: 5 September 2016
Ruling
Subject: Assessability of surrendered life insurance bonus payments
Question
Will your share of the lump sum payment you receive from surrendering your life insurance policies be included in your assessable income?
Answer
No.
This ruling applies for the following period
1 July 2016 to 30 June 2017
The scheme commenced on
1 July 2016
Relevant facts
You took a number of whole of life insurance policies before September 1985.
You are the owner of all the policies, except for one where you are a co-owner.
You intend to surrender the policies.
When you surrender the policies you will receive lump sum payments, 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 (sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).
Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997).
Statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law (section 6-10 of the ITAA 1997).
Ordinary income
Taxation Ruling IT 2504 discusses life assurance policies and states that bonuses received on a policy of life assurance are not income according to ordinary concepts and are therefore not assessable income under section 6-5 of the ITAA 1997.
In your case, the lump sum payments (including bonuses) you will receive when you surrender your life insurance policies is not ordinary income. However, it is necessary to consider whether the lump sum amount will constitute statutory income.
Statutory income
The specific provisions of the income tax law which are relevant to life insurance policies are discussed below.
Section 15-75 of the ITAA 1997 provides that the assessable income of a taxpayer includes any amount received as a bonus, other than a reversionary bonus, on a life insurance policy. A reversionary bonus is one paid on maturity, forfeiture or surrender of a life insurance policy.
In your case, any bonuses included in the lump sum payment you will receive will be paid on surrender of the policy, and are therefore reversionary bonuses. As such, section 15-75 of the ITAA 1997 does not apply.
Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in assessable income certain reversionary bonuses received in respect of life assurance policies where the date of commencement of the policy is after 27 August 1982.
These bonuses are in respect of those life insurance policies which are surrendered before the expiry of a ten year period from when they were taken out.
As you have held your policies for over 30 years, Section 26AH of the ITAA 1936 will not apply.
The capital gains tax (CGT) provisions operate in certain circumstances when there is a disposal of an asset. However, as your life insurance policies were acquired prior to 20 September 1985, the CGT provisions also have no application.
The lump sum payment you will receive on surrender of your life insurance policy is not assessable income as it is neither ordinary nor statutory income. You therefore do not have to pay income tax on this amount.