Edited version of private advice

Authorisation Number: 1051860044898

Date of advice: 15 July 2021

Ruling

Subject: CGT and a death claim payment

Question

Is the payment made to the company under the insurance policy tax free?

Answer

Yes

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XX is the surviving spouse of the deceased who passed away in 20XX.

In or around circa 19XX the deceased entered into a whole life insurance policy.

The legal entity policy holder was held by an Australian private resident company (the company) in the capacity as trustee for the Family trust.

The company first became registered in 19XX.

XX and the deceased were directors and shareholders of the company.

The company paid the insurance premium payments until 20XX when the company voluntarily ceased trading.

At the same time in 20XX The Family trust dissolved, and the deceased also ceased working.

The policy holder details did not change and stayed in the name of the company.

From 20XX the payments were then made by the deceased until or around their date of death.

Upon the deceased's death and in order for the policy issuer to pay the proceeds of the policy, the policy issuer only recognised the company as the legal owner. The company was re-registered through Australian Securities and Investments Commission in or around 20XX.

In 20XX the insurer paid the company a payment of death claim for life insured person under this plan.

The proceeds are being held in a solicitor's trust account.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-300

Reasons for decision

Section 6-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997) discusses amounts that are not ordinary income but are included in your assessable income by another provision are called statutory income.

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is section 102-5 (capital gains).

Your assessable income includes your net capital gain for the income year (subsection 102-5(1) of the ITAA 1997). You make a capital gain (or loss) as a result of a CGT event happening to an asset in which you have an ownership interest (section 102-20).

A CGT asset is any kind of property; or a legal or equitable right that is not property (section 108-5 of the ITAA 1997).

CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being redeemed, cancelled, released, discharged, satisfied, expiring or surrendered (subsection 104-25(1) of the ITAA 1997). The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends (subsection 104-25(2)).

In some instances, a capital gain may be reduced or disregarded. For example, paragraph 118-300(1) of the ITAA 1997 allows a capital gain to be disregarded in certain circumstances where the CGT asset is an interest in rights under an insurance policy. These circumstances include general insurance policies where property is insured and life insurance policies.

In your case, the legal entity holding the policy was the company and had the right to receive the lump sum payment as the intangible CGT asset and the company's legal ownership of that asset ended when they received the lump sum benefit. At that time CGT event C2 happened and the company made a capital gain. The company satisfied the conditions to be entitled to the lump sum benefit as the policy insurer only continued to recognise the company as the legal owner.

Item 3 of the table in section 118-300(1) states that a capital gain or loss made from a CGT event happening in relation to a CGT asset that is your interest in rights under a life insurance policy is disregarded if you are the original owner of the policy or instrument. Therefore, the capital gain made by the company is disregarded.

Because the trustee held the life insurance interest on behalf of the beneficiaries of the family trust, a payment to a beneficiary will maintain the character of the original payment and is exempt from CGT.