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Edited version of private advice
Authorisation Number: 1051624524873
Date of advice: 6 January 2020
Ruling
Subject: Foreign investment bond
Question 1
Will the irrevocable beneficiary appointment and/or the assignment of an interest in the foreign investment bond result in an amount to be assessable to you under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
No.
Section 99B of the ITAA 1936 provides that where a resident beneficiary 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. However, a distribution that comprises of the corpus of the trust, or an amount that would not normally be assessable in the hands of an Australian resident taxpayer, is not included in assessable income.
The foreign investment bond comprises the corpus of the Trust and the irrevocable beneficiary appointment and/or the assignment of an interest in the bond to you will comprise solely of the corpus of the trust or an amount that would not have been assessable if the trust had of been an Australian resident taxpayer.
Question 2
Can you disregard any capital gain arising from CGT events E5 or E7 following the irrevocable beneficiary appointment and/or the assignment of an interest in the foreign investment bond to you?
Answer
Yes
CGT event E5 applies if a beneficiary becomes entitled to a CGT asset of a trust and CGT event E7 applies if a trustee disposes of a CGT asset of a trust to a beneficiary in satisfaction of the beneficiary's interest in the trust capital.
However, a capital gain or loss the beneficiary makes is disregarded if the taxpayer acquired the CGT asset that is their interest (except by way of assignment from another entity) for no cost.
Question 3
Will the redemption of the foreign investment bond be assessable to you under section 26AH of the ITAA 1936?
Answer
No.
Section 26AH of the ITAA 1936 operates to exclude reversionary bonuses and other amounts received in respect of certain life assurance policies from a resident taxpayer's assessable income if the amounts are received 10 years or more from the date of commencement of risk. As one of the features of the Bond is that it provides for the payment of money on the death of a person, it is a life assurance policy for the purposes of section 26AH of the ITAA 1936. Therefore 26AH applies to the redemption of the investment bond.
Question 4
Can you disregard any capital gain that may arise on redemption of the foreign investment bond?
Answer
Yes.
Section 118-300 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or loss you make from the disposal of a CGT asset that is your interest in rights under a life insurance policy is disregarded if the policy is a policy of insurance on the life of an individual and certain conditions are met. You will meet those conditions.
Question 5
Will the redemption of the foreign investment bond be assessable to you under section 99B of the ITAA 1936?
Answer
No.
Section 99B of the ITAA 1936 will not apply on redemption of the bond as the assignment of the interest in the bond to you from the Trust will have already occurred and there will be no trust distribution involved in redeeming the bond.
This ruling applies for the following periods:
Year ending 30 June 2021
Year ending 30 June 2022
Year ending 30 June 2023
Year ending 30 June 2024
Year ending 30 June 2025
The scheme commences on:
1 July 2020
Relevant facts and circumstances
A relative of yours settled a Trust (the Trust) almost ten years ago.
The trustees of the Trust are your relatives.
The trustees of the Trust are not Australian residents for tax purposes, and the Trust is not an Australian tax resident.
You are a beneficiary of the Trust, an Australian resident for tax purposes and are not under a legal disability.
You acquired your interest in the property of the Trust for no expenditure.
The Trust took out an investment bond (the bond) in a foreign country almost ten years ago.
The bond has the following features:
· a single initial premium
· four lives insured, including yourself
· no fixed term
· pays out a cash sum when the last life insured dies may be redeemed early
· the bond issuer pays tax on the earnings and gains from the underlying investments earnings and gains from the underlying investments are retained and reinvested by the bond issuer and are not distributed to the bondholder other than on redemption.
The trustees of the Trust will assign the bond to you no earlier than ten years after its commencement date. This will be achieved by completing an irrevocable beneficiary appointment deed in conjunction with a deed of assignment.
The bond was acquired using funds provided by the settlor of the Trust.
The Trust was established solely to hold the bond and the Trust has never held any other assets.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 26AH
Income Tax Assessment Act 1936 Section 99B
Income Tax Assessment Act 1997 Section 104-75
Income Tax Assessment Act 1997 Section 104-85
Income Tax Assessment Act 1997 Section 118-300