Edited version of your written advice

Authorisation Number: 1051232240857

Date of advice: 02 June 2017

Ruling

Subject: Foreign life policy

Questions and answers

Will any part of the amounts you receive from your foreign life insurance policies be included in your assessable income?

No.

This ruling applies for the following periods:

Year ended 30 June 2017.

Year ended 30 June 2018.

Year ended 30 June 2019.

Year ended 30 June 2020.

The scheme commenced on:

1 July 20xx.

Relevant facts and circumstances

You became a resident of Australia for tax purposes in xxx.

You have country A 'whole of life’ insurance policies.

You purchased the policies in xxxx/xx when you were a country A resident for tax purposes.

You are going to cash out the policies.

You will pay tax in Country A upon termination of the policies.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 26AH

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 1997 Section 104-5

Income Tax Assessment Act 1997 Section 118-300

Reasons for decision

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included:

● income according to ordinary concepts; that is, ordinary income (section 6-5 of the ITAA 1997), or

● an amount which is included by a specific provision about assessable income; that is, statutory income (section 6-10 of the ITAA 1997).

Taxation Ruling IT 2504 - income tax: deductibility of interest on borrowed funds - life assurance policies states that bonuses received on a policy of life assurance are not income according to ordinary concepts and therefore do not constitute assessable income.

In your case, the bonuses will not be ordinary income and they will only be included in your assessable income if they are statutory income.

Section 15-75 of the ITAA 1997 provides that assessable income includes any amount you receive as or by way of bonus on a life insurance policy, other than a reversionary bonus. A reversionary bonus is a bonus paid on maturity, forfeiture or surrender of a policy.

Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in assessable income certain reversionary bonuses received under short term life insurance policies.

You will receive a final bonus on the cashing out of your policy. The final bonus will be considered to be a reversionary bonus.

Bonuses received under a life insurance policy are not assessable under section 26AH of the ITAA 1936 if the policy was taken out after 1983 and has been held for a minimum of 10 years.

In your case, you will receive bonuses from your policies when they are cashed out and you have held these policies for more than 10 years.

Therefore, the bonuses you receive will not be assessable under section 26AH of the ITAA 1936.

A capital gain or capital loss may be made if a CGT event happens to a CGT asset. An insurance policy is a CGT asset. An increase in value of an investment is not a CGT event. The surrender of a life insurance policy gives rise to a CGT event (section 104-5 of the ITAA 1997 CGT event C2).

However, section 118-300 of the ITAA 1997 provides that if a CGT event happens to a life insurance policy, any capital gain or loss made from it by the beneficial owner of the policy is ignored for CGT purposes.

Therefore, no part of the amounts you receive from cashing out your life policies will be included in your assessable income under the capital gains tax provisions.

As the amounts are not taxable in Australia, you will not be entitled to a Foreign Income Tax Offset for the foreign tax paid.