Edited version of private advice

Authorisation Number: 1051910296871

Date of advice: 29 October 2021

Ruling

Subject: Foreign life policy and foreign investment bond

Question 1

Is any capital gain (or capital loss) made by you from the withdrawal of amounts of initial contributed capital of Bond A disregarded under section 118-300 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. As Bond A incorporates a life assurance policy, it is evident that it is a policy of insurance on the life of an individual. Although the receipt of a lump sum payment from a life insurance policy may give rise to a capital gain, section 118-300 of the ITAA 1997 provides that a capital gain made under a policy of insurance on the life of an individual is disregarded and is not included in assessable income.

Question 2

Will you be assessed in respect of any reversionary bonus received when Bond A matures, is forfeited or surrendered more than 10 years from the date of commencement of the Bond?

Answer

No. Certain bonuses received on surrender or maturity of a life insurance/assurance policy may be included in assessable income under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936). However, section 26AH of the ITAA 1936 operates so that reversionary bonuses received more than 10 years from the date of commencement of a life assurance policy are excluded from assessable income.

Question 3

Does section 99B of the ITAA 1936 apply to withdrawals made from Bond B on the basis that the Bond is a foreign trust?

Answer

Yes. Bond B operates as a manged investment fund and is therefore a foreign trust for Australan taxation purposes. Section 99B of the ITAA 1936 deals with the receipt of trust income not previously subject to tax in Australia. Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year 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, unless the amount is excluded under subsection 99B(2) of the ITAA 1936.

Question 4

Is the corpus of the foreign trust the value of Bond B at the time it was assigned to you?

Answer

Yes. The corpus of the trust represents the value of the Bond when it was assigned to you.

Question 5

Are the amounts representing income of Bond B that you received while you were a temporary resident non-assessable non-exempt income?

Answer

Yes. Although section 99B of the ITAA 1936 applies to distributions from foreign trusts, the distributions you received while you were a temporary resident were non-assessable non-exempt income under section 768-910 of the ITAA 1997.

Question 6

Are the amounts representing income of Bond B that you received, and will receive, after you ceased to be a temporary resident included in your assessable income under section 99B of the ITAA 1936?

Answer

Yes. Section 99B of the ITAA 1936 applies to distributions from a foreign trust that represent income of the trust as these distributions are not excluded as corpus under subsection 99B(2) of the ITAA 1936.

This ruling applies for the following period periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You moved to Australia from Country X on a temporary visa and subsequently became an Australian resident for tax purposes.

You were a temporary resident for Australian tax purposes for a period of time as you satisfied the definition of temporary resident in section 995-1 of the ITAA 1997.

You ceased to be a temporary resident after a period of time as you entered into a relationship with your partner who was an Australian citizen.

Bond A

You invested a sum of money into Bond A which was offered by a Country X entity.

The Bond is an investment linked life assurance policy which includes a cash facility.

You are the sole beneficiary under the life assurance policy.

The features of the Bond include the following:

•         It is a whole of life assurance policy which also provides a long-term investment vehicle

•         Allows the investment to grow over the medium and long term through a broad range of investment types

•         Allows withdrawals on a regular or one-off basis including full withdrawal

•         On your death, your personal representatives will receive 101% of the encashment value of the Bond.

You made withdrawals of original contributions of capital from the Bond after you became a resident of Australia for tax purposes. Such amounts were not amounts of income or 'bonus' amounts from the Bond.

Bond B

Bond B was originally established in Country X by a relative of yours.

You subsequently inherited an ownership interest in the Bond with a value of $X.

The features of Bond B include the following:

•         To increase the value of the investment by investing in stock markets

•         While there is no fixed term, the product information states that the bond should be viewed as a medium to long term investment

•         The Bond holder is able to make withdrawals of original capital during the term of the Bond and the Bond can be redeemed or surrendered at any time

•         There is no life insured under the Bond

•         On your death, ownership of the Bond passes to the surviving policyholder(s) or to your personal representative.

After you became a tax resident of Australia you received regular amounts of income from Bond B derived from the underlying investment earnings of the bond.

You receive annual statements for the Bond which list amounts credited and withdrawn from the Bond. The value of the Bond is based on the number of units held and the value of those units.

To date, you have not made any withdrawals of the initial Bond capital.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 26AH

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1997 section 118-300

Income Tax Assessment Act 1997 section 768-910

Income Tax Assessment Act 1997 section 995-1