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Edited version of your written advice
Authorisation Number: 1051489729469
Date of advice: 26 April 2019
Subject: Traded endowment policies
Question 1
Will the cost base of a unitholder’s units in the Aussie TEP Fund (the Fund) be reduced under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent to which they are assessed under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) on a share of the income of the Fund?
Answer
No.
Question 2
Will the cost base of a unitholder’s units in the Fund be reduced under Part 3-1 of the ITAA 1997 to the extent to which they receive non-assessable distributions in respect of those units?
Answer
Yes, subject to section 104-71 of the ITAA 1997.
This ruling applies for the following periods:
Income year ending 30 June 2019
Income year ending 30 June 2020
Income year ending 30 June 2021
The scheme commenced on:
6 February 2019
Relevant facts and circumstances
The trust is an Australian unit trust. It offers Investors the opportunity to invest in units of the trust. The trustee of the unit trust invests in TEPs (meaning Endowment Policies that are owned by someone other than the original owner).
The unit trust is an unregistered managed investment scheme which pools Investors’ money and invests in a portfolio of Australian TEPs which have an asset value and a fixed maturity date. The unit trust will hold those TEPs until maturity. Once the TEP is purchased the following occurs:
● statutory title is vested in the Trustee;
● the issuing Life Company allocates its bonuses to the TEP annually;
● there are no fees/expenses payable to the Life Company in respect of a TEP other than the annual premium;
● six weeks before the TEP’s maturity, the Manager notifies the Life Company where to pay the maturity amount; and
● the maturity amount is paid by the Life Company on the maturity date.
The TEP is a zero coupon investment and the maturity value of the TEP will include the total of the Sum Insured, Accumulated Reversionary Bonuses (constituting annual bonuses on the TEP credited each year) and a Terminal Bonus (constituting the bonus applied to a TEP on the earlier of death of the original life insured or the fixed maturity date of the policy).
Each Unit in the Fund confers an equal and proportionate beneficial interest in the net assets of the Fund. Any person that is a Unitholder during the Financial Year will be presently entitled to all of the Distributable Amount payable to them in respect of the relevant Financial Year in the proportion that the Distributable Amount payable to them in respect of the Financial Year bears to the sum of the Distributable Amount payable to all Unitholders.
Assumptions
1. Investors in the unit trust are residents of Australia for tax purposes.
2. None of the TEPs are issued by a life assurance company the whole of the income of which is exempt from tax.
3. The only assets of the unit trust are TEPs and cash deposits (in the form of bank accounts).
Relevant legislative provisions
Income Tax Assessment Act 1936 section 97
Income Tax Assessment Act 1936 subsection 95(1)
Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 section 104-70
Income Tax Assessment Act 1997 subsection 104-70(1)
Income Tax Assessment Act 1997 paragraph 104-70(1)(b)
Income Tax Assessment Act 1997 section 104-71
Income Tax Assessment Act 1997 subsection 118-300(1)
Income Tax Assessment Act 1997 subsection 118-300(1A)
Life Insurance Act 1995 section 200
Reasons for decision
Question 1
Detailed reasoning
A reduction in the cost base of the units may occur when a payment is made to a unitholder in respect of the unit and some or all of that payment is not included in the assessable income of the taxpayer (the unitholder), see section 104-70 of the ITAA 1997.
Where an amount is included in the net income of the trust estate as calculated pursuant to subsection 95(1) of the ITAA 1936 and a unitholder is presently entitled to a share of that income under section 97 of the ITAA 1936, the taxpayer is assessed on that share of income. Therefore that share of income will not reduce the unit’s cost base held by the taxpayer.
Question 2
Detailed reasoning
Subsection 104-70(1) of the ITAA 1997 states:
CGT event E4 happens if:
(a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for *CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and
(b) some or all of the payment (the non-assessable part) is not included in your assessable income.
To avoid doubt, in applying paragraph (b) to work out what part of the payment is included in your assessable income, disregard your share of the trust's net income that is subject to the rules in subsection 115-215(3).
Where the amount by which the distribution from the Fund exceeds the amount assessable to the Unitholders, this amount is potentially a 'non-assessable' part for the purposes of section 104-70 of the ITAA 1997. However section 104-71 of the ITAA 1997 provides exclusions and states:
In working out the non-assessable part referred to in section 104-70, disregard any part of the payment that is:
(a) *non-assessable non-exempt income; or
(b) (Omitted by No 66 of 2003)
(c) paid from an amount that has been assessed to the trustee; or
(d) paid from an amount that is *personal services income included in your assessable income, or another entity's assessable income, under section 86-15; or
(da) a payment to which paragraph 118-37(1)(ba) applies (about compensation paid through a trust); or
(db) a payment to which subsection 118-300(1A) applies (about insurance and annuity payments paid through a trust);
(e) repaid by you; or
(f) compensation you paid that can reasonably be regarded as a repayment of all or part of the payment; or
(g) an amount referred to in section 152-125 (which exempts a payment of a small business 15-year exemption amount) as an exempt amount.
Subsection 118-300(1A) of the ITAA 1997 provides:
A *capital gain or *capital loss you make from a *CGT event happening because you receive a *CGT asset from the trustee of a trust is disregarded if:
(a) you receive the CGT asset as:
(i) a beneficiary of the trust; or
(ii) a *legal personal representative of a beneficiary of the trust; and
(b) the CGT asset is attributable to another CGT event and CGT asset to which table item 3 in subsection (1) applies for the trustee.
Subsection 118-300(1) of the ITAA 1997 states at item 3 in the table
A *capital gain or *capital loss you make from a *CGT event happening in relation to a *CGT asset that is your interest in rights under a *general insurance policy, a *life insurance policy or an *annuity instrument is disregarded in the situations set out in this table.
…
3 |
A policy of insurance on the life of an individual or an *annuity instrument |
the original owner of the policy or instrument (other than the trustee of a *complying superannuation entity) |
The Explanatory Memorandum to Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 provides:
Insurance policies and annuity instruments
Trustees and other taxpayers (other than the trustee of a complying superannuation entity)
3.10 A capital gain or capital loss made from a CGT event happening to an interest in a policy of insurance on the life of an individual or an annuity instrument is disregarded by the original owner of the policy or instrument (except if they are the trustee of a complying superannuation entity, see item 5 of the table in subsection 118-300(1) in relation to trustees of a complying superannuation entity for these types of interests). [Schedule 3, item 4, table item 3 in subsection 118-300(1)]
3.11 The amendment removes the reference to 'original beneficial owner' to ensure that taxpayers, such as trustees can claim the CGT exemption for compensation or damages received, where they hold the legal interest in the relevant insurance policy for a beneficiary.
Subsequent payment to a beneficiary
3.12 Where a trustee then makes a payment to a beneficiary in respect of the policy or instrument, any capital gain or capital loss made by the beneficiary is also disregarded. This exemption also applies where the payment is made to a legal personal representative, as defined in the ITAA 1997. For example, the exemption applies where the payment is made to the executor of an estate of an individual who has died. This ensures that the CGT exemption is not clawed back when proceeds are subsequently distributed to a beneficiary or their legal personal representative. [Schedule 3, item 6, subsection 118-300(1A)]
Therefore where the non-assessable part includes an amount to which subsection 118-300(1A) of the ITAA 1997 applies, this amount is disregarded for the purposes paragraph 104-70(1)(b) of the ITAA 1997, which provides that CGT event E4 happens where some or all of a trust distribution is not included in a unitholder’s assessable income.
The cost base of the unitholder’s units in the trust must be reduced by the amount of the non-assessable part of the distribution (and a capital gain will arise to the extent the reduction required would otherwise take the cost base below nil).