Edited version of private advice

Authorisation Number: 1051643980926

Date of advice: 17 March 2020

Ruling

Subject: Accessibility of income received from a foreign life insurance policy

Question

Is an amount received from a foreign life insurance policy assessable?

Answer

No.

Question

If the amount received per above is assessable, then can a deduction be made from the payment for a loan owing by the deceased to the insurer?

Answer

Not applicable

Question

If the amount received per above is assessable, then can the special maturity dividend and paid up additions be disregarded as the policy was more than 30 years old (as per life insurance bonuses on Australian policies).

Answer

Not applicable

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You were the recipient of your ex-spouses life insurance policy

The policy was held in a foreign country where your ex-spouse resided

Your ex-spouse held this policy for approximately 30 years

You are an Australian resident for taxation purposes

The payment received XX/XXXX/ 2018 included the following amounts

Special Maturity Dividends - $XX,XXX

Death Benefit - $XXX,XXX

Less Outstanding Loan - ($XX,XXX)

Refund of Premium $XXX

Interest - $XX

Total amount received $XXX,XXX

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 118-300

Income Tax Assessment Act 1997 Section 118-300(1A)

Income Tax Assessment Act 1936 Subsection 25(1)

Income Tax Assessment Act 1936 Section 26AH

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and Section 6-10 of the ITAA 1997 state that assessable income includes ordinary income and statutory income from all sources, whether in or out of Australia.

Lump sum payments

Lump sum payments received under life insurance policies are not considered ordinary income. However bonus amounts can be included in assessable income under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936).

Bonus payments

Section 26AH provides that a taxpayer's assessable income shall include bonuses, and some other amounts in the nature of bonuses, received under a relevant life assurance policy ("an eligible policy") during a specified period ("the eligible period"). An eligible policy is defined to mean a policy of life assurance in relation to which the date of commencement of risk is after 27 August 1982, while the date of commencement of risk in relation to an eligible policy is -

·        the date of commencement of the period to which the first or only premium paid under the policy relates; or

·        where the first or only premium does not relate to a particular period, the date of payment of that premium.

The eligible period in respect of an eligible policy is the first 10 years in the case of a policy with a date of commencement of risk after 7 December 1983 or the first 4 years where the date of commencement of risk is after 27 August 1982 and on or before 7 December 1983.

The combined effect of sub-sections 26AH(6) and (14) is that, for an eligible policy taken out after 27 August 1982 and on or before 7 December 1983, amounts received as or by way of bonuses are included in the recipient's assessable income in full if received within two years of the date of commencement of risk of the policy, and as to two-thirds or one-third if received in the third or fourth year after that date. In respect of an eligible policy taken out after 7 December 1983, amounts received as or by way of bonuses are assessable in full if received in the first eight years after the date of commencement of risk of the policy, and as to two-thirds or one-third if received in the ninth or tenth year after that date.

Capital gains on lump sums

Amounts received as a lump sum are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

The surrender or discharge of a life insurance policy gives rise to a CGT event (section 104-5 ITAA 1997 - CGT event C2). However, section 118-300 ITAA 1997 excludes from the application of the CGT provisions certain capital gains or capital losses relating to the taxpayers interests under insurance policies in specified circumstances.

Item 4 of the table in section 118-300 ITAA 1997 provides that 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 CGT event happens to a policy of insurance on the life of an individual; and

·        the taxpayer acquired the interest in the policy or instrument for no consideration,

Application to your circumstances

As the lump sum payment you received was as the result of the maturity of a life insurance policy held for longer than 10 years, it will not be considered ordinary income and 26AH of the ITAA 1936 will not apply resulting in this amount being non assessable for the year ending 30 June 2018.

As stated in Paragraph 2 of Taxation Ruling IT 2504, the bonus payments you received are not assessable as ordinary income. Special maturity dividend and paid up additions are considered bonus payments. As the bonuses are received from a policy that is held for more than 10 years, section 26AH of the ITAA 1936 will therefore not apply resulting in this amount being non assessable for the year ending 30 June 2018.

The lump sum payment you received as a result of the maturation of your ex-spouses' foreign life insurance policy is considered a distribution to a beneficiary of the policy. As stated in section 118-300 ITAA 1997, this lump sum is not subject to CGT as you acquired the interest in the policy for no consideration.