Edited version of private advice

Authorisation Number: 1051930250222

Date of advice: 7 December 2021

Ruling

Subject: Life Assurance Policy

Question 1

Does the international investment bond meet the definition of a life insurance policy as set out in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Is the international investment bond an eligible policy under the Income Tax Assessment Act 1936 (ITAA1936)?

Answer 2

Yes

Question 3

Will any capital gains or losses arising from the surrender of the bond be disregarded under section 118-300 of the ITAA 1997?

Answer 3

Yes

This ruling applies for the following period:

Year ending 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Many years ago, a discretionary trust was created by your grandparent (The Trust). It was established with a capital contribution from your grandparent. No additional capital contributions were made to The Trust.

The Trust is a non-resident trust.

Your grandparent set up an International Investment Bond which is a single contribution, whole of life policy (or policies) where the benefits are linked to units of a range of investment funds selected by the Bondholder. The International Investment Bond is held in The Trust.

The initial contribution allocated to several funds.

Your grandparent was a foreign resident and died several years ago. The trustees of The Trust were not residents of Australia.

You are a beneficiary of The Trust.

Your share of the bond is X clusters out of X clusters.

A few years ago, the Trustees of the Trust and you signed a Deed of Assignment.

You were assigned your share of the bond, the details of which are set out in a Schedule of the Deed of Assignment.

You surrendered the bond. Following this, you received a letter notifying you that an amount had been paid to your nominated bank account, representing the surrender value of your share of the bond.

You did not provide any consideration for your share of the bond. The bond was established more than 10 years ago.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 26AH

Income Tax Assessment Act 1997 section 118-300

Income Tax Assessment Act 1997 section 995-1

Life Insurance Act 1995 section 9

Life Insurance Regulations 1995 Regulation 2.01

Reasons for decision

The definition of a life insurance policy is set out in section 995-1 of the Income Tax Assessment Act 1997(ITAA 1997). That definition takes its meaning from section 9 of the Life Insurance Act 1995 (LIA).

Section 9 of the LIA provides that:

Section 9 Life policy

(1)          Subject to subsection (2), each of the following constitutes a life policy for the purposes of this Act:

(a)          a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;

(b)          a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life;

(c)          a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life;

(d)          a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the term prescribed by the regulations for the purposes of this paragraph;

(e)          a continuous disability policy;

(f)           a contract (whether or not it is a contract of insurance) that constitutes an investment account contract;

(g)          a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract.

(2)          A contract that provides for the payment of money on the death of a person is not a life policy if:

(a)          by the terms of the contract, the duration of the contract is to be not more than one year; and

(b)          payment is only to be made in the event of:

(i) death by accident; or

(ii) death resulting from a specified sickness.

The International Investment Bond (Bond) in question is considered a life insurance policy as it satisfies the conditions in paragraph 9(1)(d) of the LIA. In addition, Regulation 2.01 of the Life Insurance Regulations 1995 provides that the term of 10 years is prescribed as the term that the term of an annuity paid under a contract must exceed for the contract to constitute a life policy. Accordingly, the Bond meets the terms of Regulation 2.01.

Question 2

Summary

Yes. The International Investment Bond is an eligible policy under the Income Tax Assessment Act 1936 (ITAA 1936)

Detailed reasoning

Under section 26AH of the ITAA 1936, a life assurance policy is deemed to be an eligible policy where the date of commencement of risk is after 27 August 1982. 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.

In your case, the International Investment Bond was created in 2004 and therefore it is considered an eligible policy.

Question 3

Summary

Yes. Any capital gains or losses arising from the surrender of the International Investment Bond can be disregarded under section 118-300 of the ITAA 1997.

Detailed reasoning

Section 118-300 of the ITAA 1997 excludes from the application of the CGT provisions certain capital gains or capital losses relating to a taxpayer's interests under insurance policies, in specified circumstances. Item 4 of subsection 118-300(1) of the ITAA 1997 provides that the capital gain or loss is disregarded where the taxpayer acquired the interest in the life insurance policy or annuity instrument for no consideration. As you acquired the interest for no consideration, any capital gains or losses arising from the surrender of the bond will be disregarded under section 118-300 of the ITAA 1997.