Edited version of your written advice

Authorisation Number: 1051292401843

Date of advice: 9 October 2017

Ruling

Subject: Reversionary Bonus

Questions and Answers

1. Are the policies eligible policies for section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes

2. Are you entitled to a rebate under section 160AAB of the ITAA 1936 at the corporate tax rate?

Yes

3. Will any amount be assessable under Part III of the Income Tax Assessment Act 1997 (ITAA 1997)?

No

This ruling applies for the following periods

1 July 2018 to 30 June 2019

The scheme commences on

1 July 2018

Relevant facts and circumstances

You will purchase, as an investment, Traded Endowment Policies with the intention to hold the policies to maturity.

Policies that will be acquired are issued by various life companies.

You will arrange the title change with the life company, on your benefit.

The policies will be purchased at arm’s length from an independent third party.

The third party will supply the policy assignment papers and conversion to endowment quotes, issued by the life company, who will register these instruments with the life company.

Upon registration of title change document, the following corporate actions will be processed by the life company contemporaneously:

Assignment of title from either the third party or original policy owner to whom the third party has paid money for the purchase of the policy, using a Memorandum of Transfer.

● Conversion to endowment policy with a Change of Table.

● Alteration of premium frequency to annual.

● Payment of premium and loan debts, if any on the policy.

● Transfer of state of registration of the life policy to the NSW register, (if not already on such register).

You will then pay the annual premiums on the policies until maturity.

The issuing Life Company will pay you the maturity proceeds on the maturity date.

Assumptions

None

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 26AH

Income Tax Assessment Act 1936 Section 160AAB

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 118-300

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a resident taxpayer includes ordinary income derived directly and indirectly from all sources 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.

An amount paid on the maturity of an endowment policy are not received for rendering personal services, income from property, or income from carrying on a business.

Therefore, the lump sum payment will not be assessable as ordinary income.

Generally, bonuses received are assessable under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) however, reversionary bonuses on a policy of life assurance are not assessable. The bonuses on an endowment policy are considered to be reversionary bonuses as they are not actually paid out to the taxpayer but are reinvested to be part of the lump sum.

Reversionary bonuses are fully assessable under paragraph 26AH(6) of the ITAA 1936 if the life assurance policy is cashed in during the first eight years of the eligible period, two thirds assessable if cashed in the ninth year and one third assessable if cashed in during the tenth year. This is the ten year period commencing on the date of the commencement of risk, being the period in respect of which the date of the first premium was paid. If the policy matures or is otherwise terminated after ten years, section 26AH of the ITAA 1936 excludes reversionary bonuses from being assessable.

Section 160AAB of the ITAA 1936 allows a rebate in respect of amount assessable under section 26AH of the ITAA 1997. Where the trustee is assessable on an eligible 26AH amount under section 98, 99 or 99A of the ITAA 1936 the trustee is entitled to a rebate of tax equal to 30% of the rebatable amount.

Where a beneficiary is assessed on an eligible section 26AH amount under section 97, 98A or 100 of the ITAA 1936 the beneficiary is entitled to a rebate of tax equal to 30% of the rebatable amount.

As a result of the conversion of the policy from a whole of life policy to an endowment policy at the same time as the registration of its purchase, a new policy will have been created. As the new policyholder will be the original beneficial owner of the new endowment policy section 118-300 of the ITAA 1997 will operate to exempt any capital gain or loss that may be made upon the disposal of the policy by the new policy holder.