Edited version of your written advice

Authorisation Number: 1051460723076

Date of advice: 12 February 2019

Ruling

Subject: Income- reversionary bonus

Question

Are you assessed in respect of a reversionary bonus when the life policy matures, is forfeited or surrendering after 10 years from the commencement of risk?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You subscribed to a foreign life policy (the policy) with an international insurer.

You have been an Australian resident for tax purpose since entering into the policy.

The policy was issued by a non-resident insurer, which is not authorised to carry on life insurance business in Australia.

The currency of the policy is not AUD but is in a foreign currency.

You contributed fund on entering into the policy and at a later date.

The redemption value as at 30 June XXXX is XXX.XXX.

Under the policy, you can make additional payments.

The term of the policy is XX years.

The policy provides for the payment of a capital in the event of life and the payment of capital in case of death.

You have not requested a total or partial surrender of the policy at any time during the time the policy has been held.

You have no intention of redeeming or otherwise surrendering the policy within 10 years of the date of commencement of risk.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 118-300.

Income Tax Assessment Act 1936 Section 26AH.

Income Tax Assessment Act 1936 Subsection 26AH(6).

Income Tax Assessment Act 1936 Section 26AH(13).

Reasons for decision

Assessability of amounts that accrue in foreign life policy

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income consists of both ordinary income and statutory income. However, an amount of ordinary or statutory income will not be assessable income if the amount is made exempt or is otherwise excluded from assessable income. In working out 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.

In your case, you invested in a foreign life policy. The amounts that accrue in your foreign life policy result in changes in the value of the policy.

As the amounts that accrue 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.

Furthermore, there are no provisions in the capital gains tax legislation that would operate to include these amounts as assessable capital gains.

Therefore, the amounts that accrue annually in your foreign life policy are not assessable as ordinary or statutory income in Australia.

Assessability of reversionary bonuses

Section 26AH of the ITAA 1936 provides for the taxation of certain reversionary bonuses received under a relevant life assurance policy (an eligible policy) during a specified period (the eligible period).

The section provides that a taxpayer’s assessable income shall include all bonuses received under an eligible policy during an eligible period. It does not provide for the inclusion of such payments in a taxpayer’s assessable income if received outside of an eligible period.

An eligible policy is defined as a life assurance policy for which the date of commencement of risk is after 27 August 1982. Eligible period, in relation to an eligible policy, means the period of 10 years commencing on the date of commencement of risk of the policy.

Reversionary bonuses are paid on maturity of the life assurance policy. They can also be paid when policies are partially surrendered. The effect of section 26AH of the ITAA 1936 is that for policies taken out after 7 December 1983, the full reversionary bonus is assessable if it is received in the first eight years, two-thirds of the bonus if received in the ninth year and one-third of the bonus if received in the tenth year (subsection 26AH(6) of the ITAA 1936).

Reversionary bonuses received more than ten years from the date of commencement of risk do not fall within the operation of section 26AH of the ITAA 1936 and are not included in the a taxpayer’s assessable income.

Note: Subsection 26AH(13) of the ITAA 1936 states that the 10 year period is reset if the premiums in one year exceed the premiums in the previous year by more than 25%.

CGT exemption for the cancellation, surrender or ending of an insurance policy

CGT is the tax you pay on certain gains you make. Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss as a result of a CGT event happening to an asset in which you have an ownership interest. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property; or a legal or equitable right that is not property.

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

A capital gain or loss from a relevant CGT event (cancellation, surrender and similar endings) happening in relation to a taxpayer's interest in rights under a life insurance policy or an annuity instrument is disregarded if either:

● the taxpayer is the original beneficial owner of the policy or instrument

● if not, the taxpayer acquired for no consideration the interest in the policy

● the taxpayer is the trustee of a complying superannuation

In your case, the policy was taken out after 28 August 1982 and will be held for more than 10 years from the date of risk commencement which was 8 June 2010. Therefore, where the conditions of section 26AH of the ITAAA 1936 have been met and the reversionary bonus received from the maturity of the policy is not assessable income.

You acquired the policy for no consideration.

Therefore, no amount of a reversionary bonus or capital gain is included as assessable income on ending the policy.