Edited version of private advice

Authorisation Number: 1052088739053

Date of advice: 16 February 2023

Ruling

Subject: Bonuses received in respect of life assurance policies

Question 1

Will any capital gain arising from the surrender of the investment bonds that have been assigned by the overseas trusts to you be disregarded under section 118-300 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Item 4 of subsection 118-300(1) of the ITAA 1997 will disregard the capital gain or loss as the interests in the life insurance policy were acquired for no consideration.

Question 2

Will the proceeds received from the surrender of the overseas investment bonds which have been assigned to you be non-assessable under the section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) if you surrender the bond less than 10 years from the time they are assigned?

Answer

Yes.

Subsection 26AH(1) defines 'eligible period' as 'the period of 10 years commencing on the date of commencement of risk of the policy.' As you will be surrendering the investment bonds more than 10 years after the commencement of the risk under the policies, any proceeds you receive will not be included in your assessable income.

Question 3

If the investment bonds are assigned to you and partly surrendered over several years, will they be non-assessable under the section 26AH of the ITAA 1936 if you surrender a portion of the bonds less than 10 years from the time they are assigned?

Answer

Yes.

As noted above, the risks under both policies commenced more than 10 years ago. Amounts you receive from surrendering the bonds will not be included in your assessable income, regardless of when you surrender the bonds.

Question 4

Would the amounts you receive from the trusts be assessable under section 99B of the ITAA 1936 where the policies are surrendered by the trusts?

Answer

No.

The Commissioner does not include in assessable income under section 99B of the ITAA 1936 a bonus received by a resident beneficiary of a non-resident trust from foreign life assurance policy held by the trust where the amount was paid more than 10 years after the commencement of the policy.

This ruling applies for the following period:

1 July 20XX - 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You became an Australian resident for tax purposes less than 10 years ago.

Over 10 years ago, two trusts were established outside Australia that both invested in investment bonds.

You are the specified beneficiary of both trusts.

The settlor of the trusts is Person X, and the trustees are Person X, Person Y, and Person Z.

Person X and Person Y are your parents and are not residents of Australia for tax purposes.

Person X loaned an amount to each of the trusts at establishment. The trusts invested the loaned money in life insurance bonds outside of Australia.

Trust 1 invested in Bond A.

The policy contained a death benefit payable on the death of the life insured, yourself and Person X. The benefit can also be paid upon surrender of the bond.

The value of the bond increased over time.

There have been regular withdrawals each year since the commencement of the bond. These withdrawals were returned to Person X.

There have been no additional premiums paid throughout the life of the policy.

Trust 2 invested in Bond B.

The investment activities of Trust 2 are identical to those of Trust 1.

The trustees are proposing that the balance of the investment bonds either be assigned from the existing trusts to you personally or surrendered and the proceeds paid to you.

This balance includes the accumulated investment income or bonus applied to the balance of the fund throughout the life of the bond.

Neither Person X nor yourself, the lives assured under both policies, have died.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 26AH

Income Tax Assessment Act 1936 section99B

Income Tax Assessment Act 1997 section 118-300