Edited version of your written advice

Authorisation Number: 1051352860711

Date of advice: 26 March 2018

Ruling

Subject: Assessability of foreign insurance bond

Question 1

Does the assignment to you of parts of a foreign life policy result in ordinary or statutory income assessable to you?

Answer

No.

Question 2

Do the rules for reversionary bonuses on insurance policies under section 26AH of the Income Tax Assessment Act 1936 apply to a foreign insurance policy?

Answer

Yes.

Question 3

Will any capital gains or losses arising from the redemption of the foreign life policy be disregarded under section 118-300 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You have received a distribution from a foreign trust.

The trust was established in a foreign country by your parents several years ago.

The trustees are foreign.

The trust was wholly invested in the offshore insurance bond.

The bond was taken out in excess of 10 years ago.

A further premium was added less than 10 years ago.

One part of the insurance bond has been surrendered and this resulted in the bond having a less number of parts remaining; each one of which can be dealt with as if it were a separate policy.

A Deed of Assignment was made between the trustee and yourself, assigning parts of the insurance bond to you.

A Notice of Assignment subsequently issued.

The parts of the insurance bond were distributed to you for no consideration.

The Policy Schedule identifies the policy as a life policy with lives assured being your parents.

After the death of one of your parents, your remaining parent is the only life assured and you are the policy holder of the parts assigned to you.

You want to redeem the insurance bond and invest the cash.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-75

Income Tax Assessment Act 1997 Section 118-300

Income Tax Assessment Act 1936 Section 26AH

Income Tax Assessment Act 1936 Section 99B

Reasons for decision

A Deed of Assignment was made between the trustee of the foreign trust and yourself, assigning parts of a foreign life policy to you.

Capital gains tax (CGT) event E7 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary to satisfy all or part of the beneficiary's interest in trust capital (section 104-85 ITAA 1997). A capital gain or loss made from CGT event E7 by a beneficiary is disregarded if the trust interest was acquired for no expenditure (subsection 104-85(6) ITAA 1997).

As you did not pay any amount to acquire the segments of the foreign life policy, any capital gain or loss you may have made is disregarded.

Subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection 99B(1) is not to include any amount that represents either:-

● corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer(paragraph 99B(2)(a) of the ITAA 1936)

● amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer(paragraph 99B(2)(b) of the ITAA 1936), or

● amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936 (paragraph 99(2)(c) of the ITAA 1936).

Parts of the life policy have been assigned to you and therefore you have received a portion of the corpus of the trust which has not been taxed in Australia.

Any part of the corpus that has been distributed to you that is from accumulated foreign source income or gains that would have been assessable income of a resident taxpayer had it been derived by that resident taxpayer rather than the foreign trust, will form part of your assessable income.

Capital gains tax

Certain CGT events can occur when a trust distributes an amount of cash or property to a beneficiary. In this case the foreign trust disposed of its whole of life assurance policy in parts to the beneficiaries.

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

A capital gain or loss from a relevant CGT event happening in relation to a taxpayer's interest in rights under a policy of insurance on the life of an individual or an annuity instrument is disregarded if:

● the taxpayer is the original owner of the policy or instrument (other than the trustee of a complying superannuation fund);

● the taxpayer acquired the interest in the policy or instrument for no consideration; or

● the taxpayer is the trustee of a complying superannuation entity for the income year in which the CGT event happened.

You acquired the policy as a distribution from a foreign trust for no consideration. Therefore any capital gain or loss that resulted from the CGT event is disregarded under item 4 of subsection 118-300(1) of the ITAA 1997.

Assessability of amounts that accrue in a foreign life policy

Section 6-5 of the ITAA 1997 states that assessable income consists of both ordinary and statutory income. However, an amount of ordinary or statutory income will not be assessable if the amount is made exempt or is otherwise excluded.

In considering whether you have derived an amount of ordinary income, and if so when you derived it, section 6-5 of the ITAA 1997 states that you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

You have received parts of a foreign life policy. The amounts that accrued in your foreign life policy resulted from changes in the value of the policy as all interest income, dividends and distributions which the insurer receives in respect of any assets comprising the fund accrued to form part of the fund.

As the amounts that accrued are not received by you or dealt with on your behalf, you have not actually received these amounts as income. Therefore, the amounts that accrue annually in your foreign life policy are not assessable as ordinary income in Australia.

Assessability - surrendered life policies

Section 15-75 of the ITAA 1997 provides that the assessable income of a taxpayer includes any amount received as or by way of a bonus on a life insurance policy, other than a reversionary bonus.

Reversionary bonuses are those paid on maturity, forfeiture or surrender of a life insurance policy and may be assessable under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936).

The proceeds you will receive from surrendering your foreign life policy are classed as a reversionary bonus. A reversionary bonus paid under a short term life policy on maturity, forfeiture or surrender taken out after 28 August 1982 is subject to special tax treatment if the risk commenced after 7 December 1983 under section 26AH of the ITAA 1936 as follows:

1. bonus received within the first eight years of the eligible period - assessable in full;

2. bonus received in the ninth year of the eligible period - two-thirds of bonus is assessable, but section 160AAB of the ITAA 1936 rebate may apply (see below);

3. bonus received in tenth year of the eligible period - one third of bonus is assessable, but section 160AAB rebate may apply.

A bonus received after the 10th year is tax-free.

One part of your policy was acquired in excess of 10 years ago and a further premium added less than 10 years ago. Therefore one part of your policy has been held for more than 10 years however another part has not.

Depending on when you surrender your policy, you may be assessable on that part which has not been held for more than 10 years.

Example

On 1 January 2012, A takes out a life policy. Six years later he surrenders the policy and receives a bonus of $1,200. The whole of the $1,200 forms part of A's assessable income in 2017/18. However, he is entitled to a tax offset under section 160AAB. The amount of the tax offset is calculated by applying the standard rate of tax to $1,200.

Although a tax offset is available on the amount of a bonus a taxpayer includes in their assessable income under section 26H of the ITAA 1936, this is not available in respect of bonuses received from foreign life insurance companies as they do not pay income tax in Australia (paragraph 160AAB(1)(a) of the ITAA 1936).