Edited version of private advice

Authorisation Number: 1052139545243

Date of advice: 3 August 2023

Ruling

Subject: Foreign life assurance policy and foreign currency translation

Question 1

Do the Investment policy (Policy one) and Investment policy (Policy two) 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

Yes.

Question 2

Are the amounts you received on surrender of Policy one and Policy two assessable as ordinary income in accordance with section 6-5 of the ITAA 1997?

Answer

No.

Question 3

Are the amounts you received on surrender of Policy one and Policy two assessable under section 15-75 of the ITAA 1997?

Answer

No.

Question 4

Can you disregard any capital gain or loss made on surrender of Policy one and Policy two under section 118-300 of the ITAA 1997?

Answer

Yes.

Question 5

Is the amount you received on surrender of Policy one assessable in part under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 6

Is the amount you received on surrender of Policy two assessable in part under section 26AH of the ITAA 1997?

Answer

Yes.

Question 7

Will the Commissioner form the opinion that it would be unreasonable to include any amount of income received on surrender of Policy one or Policy two in your assessable income?

Answer

No.

Question 8

If no to Question 7, will the Commissioner form the opinion that it would be unreasonable to include the amounts received on surrender of Policy one or Policy two to the extent the amounts relate to the increase in value of the policies before the taxpayer became a permanent resident of Australia?

Answer

No.

Question 9

In calculating the relevant amounts under subsection 26AH(6) of the ITAA 1936, before consideration of whether the Commissioner should exercise his discretion under subsection 26AH(8), should the taxpayer apply Item 7 of the table in subsection 960-50(6) of the ITAA 1997 to calculate the relevant amount when both the original premiums and the proceeds were paid in Great British pounds?

Answer

No.

Question 10

In calculating the relevant amounts under subsection 26AH(6) of the ITAA 1936, before consideration of whether the Commissioner should exercise his discretion under subsection 26AH(8), should the taxpayer apply Item 11 of the table in subsection 960-50(6) of the ITAA 1997 to calculate the relevant amount when both the original premiums and the proceeds were paid in Great British pounds?

Answer

Yes.

Question 11

Alternatively, would item 11A of the table in subsection 960-50(6) of the ITAA 1997 be applicable to calculate the amount to be included in assessable income when both the original premiums and the proceeds were paid in Great British pounds?

Answer

No.

Question 12

Regardless of whether Item 7, 11 or 11A of the table in subsection 960-50(6) of the ITAA 1997 applies, would the Commissioner exercise his discretion under subsection 26AH(8) of the ITAA 1997 to conclude that in determining the relevant amount to be included in the taxpayer's assessable income, the taxpayer should first calculate the "relevant amount" in Great British Pounds and convert to Australian dollars on the date of surrender?

Answer

No.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a citizen of Country A.

You came to Australia on a temporary visa on X XXXX 20XX and were taxed as a temporary resident until XX XXXX 20XX.

You were granted a permanent resident visa on XX XXXX 20XX.

You have the following investment policies:

Company P Investment Plan (Policy one)

You have a Company P Investment Plan (Policy one) with a total premium amount of XX,XXX pounds. Company P is registered in Country A and Country B.

The terms and conditions of Policy one indicate that the investment includes life insurance where on the death of the life insured, 100% to 100.1% will be paid out to the beneficiary.

You took out the investment on XX XXXXXXXX 20XX. The investment consists of XX policies in the one product.

You surrendered the investment on X XXXXXX 20XX. You received an amount on surrender of the policy.

Company P Investment Plan (Policy two)

You have a Company P Investment Plan (Policy two) for which you paid an initial premium. The policy was also issued by Company P.

The terms and conditions of Policy two indicate that the investment includes life insurance where on the death of the life insured, 100% to 100.1% will be paid out to the beneficiary.

You took out the investment on X XXXX 20XX jointly with your spouse. The investment consisted of XX policies.

On XX XXXXX 20XX, you and your spouse received a payment from the policy.

A full surrender statement was received for some of the policies with an amount paid on surrender.

A partial surrender statement was received for the remaining policies with an amount paid on surrender.

On XX XXXX 20XX you and your spouse paid an extra amount into the remaining policies.

You surrendered the policy on X XXXXXX 20XX and received an amount.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 26AH

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 15-75

Income Tax Assessment Act 1997 Section 118-300

Income Tax Assessment Act 1997 Section 960-50

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Do the Investment policy (Policy one) and Investment policy (Policy two) meet the definition of a life insurance policy as set out in section 995-1 of the ITAA 1997?

Summary

Policy one and policy two are life policies under the Life Insurance Act (LIA 1995) and are therefore life insurance policies under subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

The definition of a life insurance policy in subsection 995-1(1) of the ITAA 1997 is the same as the definition of a 'life policy' in the LIA 1995.

Subsection 9(1) of the LIA 1995 defines a 'life policy' to include:

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

Policy one and two are contracts of insurance that provide a death benefit upon the death of a person.

Policy one and two also meet the definition of a contract that constitutes an investment-linked product in accordance with subsection 14(4) of the LIA 1995.

(a)  It provides benefits calculated by reference to units the value of which is related to the market value of a specified class or group of assets of the party by whom the benefits are to be provided; and

(b)  It provides for benefits to be paid on death, or on a specified date or on death before the specified date, or the last of the specified dates, as the case may be.

Therefore, Policy one and Policy two are life assurance policies in accordance with subsection 995-1(1) of the ITAA 1997.

Question 2

Are the amounts you received on surrender of Policy one and Policy two assessable as ordinary income in accordance with section 6-5 of the ITAA 1997?

Summary

The amounts received on surrender of Policy one and Policy two are not ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that income according to ordinary concepts (ordinary income) is to be included in a taxpayer's assessable income.

Taxation Ruling IT 2504 - income tax: deductibility of interest on borrowed funds - life assurance policies states that bonuses received on a policy of life assurance are not income according to ordinary concepts.

Therefore, they do not constitute assessable income. Such amounts will only be included in assessable income if they are statutory income.

Question 3

Are the amounts you received on surrender of Policy one and Policy two assessable under section 15-75 of the ITAA 1997?

Summary

The amounts received on surrender of Policy one and Policy two include amounts that are reversionary bonuses and are therefore not assessable under section 15-75 of the ITAA 1997.

Detailed reasoning

Section 15-75 of the ITAA 1997 provides that assessable income includes any amount you receive as or by way of bonus on a life insurance policy, other than a reversionary bonus.

A reversionary bonus is a bonus paid on maturity, forfeiture or surrender of a policy.

Application to your circumstances

In your case, you received a bonus on the surrender of each of Policy one and Policy two. Therefore, it is evident that the bonuses received were reversionary bonuses.

Consequently, the reversionary bonuses received are not assessable under section 15-75 of the ITAA 1997.

Question 4

Can you disregard any capital gain or loss made on surrender of Policy one and Policy two under section 118-300 of the ITAA 1997?

Summary

As you were the original beneficial owner of Policy one and Policy two, you can disregard any capital gain or loss resulting from surrender of the policies.

Detailed reasoning

Section 118-300 of the ITAA 1997 excludes certain capital gains or capital losses relating to the beneficial owner of a life insurance policy, in particular circumstances.

The capital gains tax (CGT) exemption applies to capital gains or losses from a CGT event relating to rights under life insurance policies or annuity instruments if the taxpayer was the original beneficial owner of the policy or instrument.

As you were the owner of policies of the kind listed in Item 3 of section 118-300 of the ITAA 1997, any capital gain or loss resulting from the surrender of the policies is disregarded.

Question 5

Is the amount you received on surrender of Policy one assessable in part under section 26AH of the ITAA 1936?

Summary

The amount you received on the surrender of Policy one is partially assessable under section 26AH of the ITAA 1936.

Detailed reasoning

Certain bonuses received on surrender or maturity of a life assurance policy (eligible policy) may be included in assessable income under section 26AH of the ITAA 1936.

Reversionary bonuses received during a specified period (the eligible period) may be assessable in particular instances.

Paragraph 5 of Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation (IT 2346) states that section 26AH may apply to amounts received under any form of life assurance policy including those known as unbundled life assurance contracts which may be categorised as either investment account or investment linked policies.

An eligible policy is a policy of life assurance in relation to which 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.

For a policy with a date of commencement of risk after 7 December 1983, the eligible period in respect of an eligible policy is the first 10 years.

For eligible policies 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 the policy, and as to two-thirds if received in the ninth year, or as to one-third if received in the tenth year after that date.

Application to your circumstances

In your case, Policy one is a life assurance policy and is therefore subject to section 26AH of the ITAA 1936.

Therefore, as the policy was surrendered during the tenth year after commencement of the policy, you are assessable on one-third of the value of the reversionary bonus received on surrender.

Question 6

Is the amount you received on surrender of Policy two assessable in part under section 26AH of the ITAA 1997?

Summary

The amount you received on the surrender of Policy two is partially assessable under section 26AH of the ITAA 1936.

Detailed reasoning

As mentioned above, for eligible life assurance policies 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 the policy, and as to two-thirds or one-third if received in the ninth or tenth year after that date.

Further, under subsection 26AH(13) of the ITAA 1936, where the amount of premiums payable under an eligible policy in relation to an assurance year exceeds by more than 25% the amount of the premiums payable under the policy in relation to the immediately preceding assurance year, the eligible period in relation to the policy will recommence at the date of commencement of the premium increase year (see paragraphs 18 and 19 of IT 2346).

Application to your circumstances

In your case, Policy two commenced in 20XX, you paid an additional premium in 20XX and did not pay any premium in the preceding assurance year.

Therefore, the eligible period for Policy two restarted in 20XX.

However, even if this was not the case, we note that the Policy was surrendered within X years of the original commencement date.

As a result, you are assessable on the entire amount of the reversionary bonus amount received on surrender of the policy as the amount was received within 8 years from the commencement of the policy.

Question 7

Will the Commissioner form the opinion that it would be unreasonable to include any amount of income received on surrender of Policy one and Policy two in your assessable income?

Summary

The Commissioner will not exercise his discretion to exclude from your assessable income amounts received as reversionary bonuses from your life-assurance policies.

Detailed reasoning

The Commissioner has a discretion in subsection 26AH(8) of the ITAA 1936 to exclude from assessable income the whole or part of an amount received by way of a bonus that would otherwise be assessable under subsection 26AH(6) ITAA 1936. In doing so, the Commissioner is to have regard to:

i) the total amount of premiums paid under the eligible policy;

ii) the total amounts received by the taxpayer or by any other person under the eligible policy and the total amounts of bonuses included in the amounts so received:

iii) the amount of the surrender value of the eligible policy at the time when the forfeiture, surrender or other termination occurred; and

iv) such other matters as the Commissioner considers relevant

Paragraph 10 of Taxation Ruling IT 2346 states that the object of the discretion is to ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the holder or holders of the policy exceeds the premiums paid under the policy.

Subsection 26AH(8) of the ITAA 1936 was introduced to prevent the unintended effect of taxing bonuses where they do not exceed premiums paid for the relevant policy.

In adding the relevant clause to the Bill that introduced the section 26AH changes, Senator Walsh, Commonwealth of Australia, Senate, Official Hansard, Tuesday, 27 March 1984,page 727 stated that:

Where a policyholder terminates a traditional policy at a loss, he or she may have participated in profits, by way of bonuses, and under the Bill be taxable on those profits.

Reflecting the variety of situations that may be encountered, the first amendment will overcome this unintended effect by providing that the Commissioner of Taxation may appropriately exclude from assessable income a part of a bonus which would otherwise fall to be taxed. The Commissioner is to have regard to such matters as total premiums paid on the policy, any amounts or bonuses previously received under the policy and the surrender value of the policy.

In practice this will mean that bonuses will not be subject to tax under the new measures unless the total amount received by the holder or holders of a policy exceeds the premiums paid under the policy.

Application to your circumstances

We acknowledge that at the time of surrendering Policy one and Policy two, you had only been a resident of Australia for taxation purposes for several days.

However, there is nothing in section 26AH of the ITAA1936 that provides the Commissioner with a discretion to vary its operation to reduce the assessable amount of a reversionary bonus taking into account the residency commencement date of a taxpayer.

In relation to CGT and residency status, Division 855 of the ITAA 1997 is relevant. Division 855 of the ITAA 1997 contains rules regarding the cost base of CGT assets when becoming an Australian resident for taxation purposes.

These same rules would apply in the event that section 118-300 of the ITAA 1997 did not exempt any gain or loss incurred on disposal of Policies one and two here.

In regard to the consistency of the legislation, we also note that there is another statutory income provision that does not take into account the period of foreign residency prior to becoming an Australian resident.

ATO Interpretative Decision ATO ID 2004/66 Income Tax Assessability of payment of accumulated foreign-source income of a non-resident trust to a resident taxpayer (ATO ID 2004/66)provides that section 99B of the ITAA 1936 will apply to tax certain distributions received by an Australian resident from a non-resident trust regardless of the commencement date of a taxpayer's residency.

For Policy one, you paid a premium amount and you received an amount on surrender. As a result, the total amount you received exceeded the premiums paid by almost XX%. As the primary objective of the discretion is to ensure tax is not paid unless the total amount received exceeds the premiums paid, and you received bonuses in excess of premiums paid, the discretion is not applicable here.

For Policy two, you paid an initial premium amount and you received an amount on partial surrender of Policy two.

In 20XX, you paid a further premium amount. In 20XX, you surrendered the entirety of Policy two and received an amount. As a result, the total amount you received in bonuses is in excess of premiums paid.

Therefore, the Commissioner is unable to exercise his discretion in the circumstances and an amount under section 26H(6) of the ITAA 1936 is included in your assessable income.

Question 8

If no to Question 7, will the Commissioner form the opinion that it would be unreasonable to include the amounts received on surrender of Policy one or Policy two to the extent the amounts relate to the increase in value of the policies before the taxpayer became a permanent resident of Australia?

Summary

The Commissioner will not form the opinion that it is unreasonable to include the amount received on surrender of Policy one and Policy two to the extent it relates to the increase in value of the policies before the taxpayer became a permanent resident of Australia.

Detailed reasoning

Although you were only a resident of Australia for several days before you surrendered Policy two, Australian taxation legislation does not provide for a pro rata calculation based on the number of days of residency.

Once you became a resident of Australia, surrender of Policy one and Policy two was subject to the provisions of Australian taxation law.

As mentioned above, there is nothing in section 26AH of the ITAA1936 that provides the Commissioner with a discretion to vary its operation to reduce the assessable amount of a reversionary bonus taking into account the residency commencement date of a taxpayer.

As a result, the Commissioner will not form the opinion that it is unreasonable to include the amount received on surrender of Policy one and Policy two.

Question 9

In calculating the relevant amounts under subsection 26AH(6) of the ITAA 1936, before consideration of whether the Commissioner should exercise his discretion under subsection 26AH(8), should the taxpayer apply Item 7 of the table in subsection 960-50(6) of the ITAA 1997 to calculate the relevant amount when both the original premiums and the proceeds were paid in Great British pounds?

Summary

You should not apply item 7 of the table in section 960-50(6) of the ITAA 1997 to calculate the relevant amount as item 11 is the most appropriate item.

Detailed reasoning

Item 7 of the table in section 960-50 of the ITAA 1997 applies where an amount of 'statutory income' is included in assessable income (other than under Division 102).

Further, item 11 of the table in section 960-50(6) of the ITAA 1997 applies where an amount of a receipt is received, or a payment is made and none of the other items in subsection 960-50(6) are applicable.

Subsection 960-50(4) of the ITAA 1997 requires you to translate any amounts that are elements in the calculation of another amount into Australian currency before calculating any other amounts.

Taxation Determination TD 2006/30 concerning the translation of foreign amounts into Australian currency makes reference to paragraph 3.20 of the Explanatory Memorandum to the Bill that introduced subsection 960-50(4) of the ITAA 1997 which states:

In some cases an amount which is taken into account for tax purposes, for example an amount of income or a deduction is the sum or the result of 2 or more other amounts. An example is an amount included in assessable income under section 26BB of the ITAA 1936 or a deduction under section 70B of the ITAA 1936. Any amounts which are elements in the calculation of another amount are to be translated prior to calculating the other amount. [Schedule 4, item 59, subsection 960-50(4)].

From the above, TD 2006/30 explains that where a calculation could result in either income/gain or a deduction/loss, it is not appropriate to use item 7 in the table as this item only applies if there is an amount of statutory income. Instead, item 11 is the most appropriate item as none of the other items in subsection 960-50(6) are applicable.

Application to your circumstances

In your case, the determination of an amount assessable under section 26AH of the ITAA 1936 requires comparison of two elements, the premium payment or payments and the amount received on surrender or maturity of the policy.

Consequently, these amounts are elements in the calculation of another amount and are to be translated prior to calculating the other amount.

Therefore, item 7 of the table does not apply as it is not consistent with subsection 960-50(4) of the ITAA 1997, leaving item 11 as the most appropriate item as none of the other items in subsection 960-50(6) are applicable.

Question 10

In calculating the relevant amounts under subsection 26AH(6) of the ITAA 1936, before consideration of whether the Commissioner should exercise his discretion under subsection 26AH(8), should the taxpayer apply Item 11 of the table in subsection 960-50(6) of the ITAA 1997 to calculate the relevant amount when both the original premiums and the proceeds were paid in Great British pounds?

Summary

You should apply Item 11 of the table in section 960-50(6) of the ITAA 1997 to calculate the relevant amount

Detailed reasoning

As mentioned above, subsection 960-50(4) of the ITAA 1997 requires you to translate any amounts that are elements in the calculation of another amount into Australian currency before calculating any other amounts.

Item 11 of the table of section 960-50(6) of the ITAA 1997 applies where an amount of a receipt is received, or a payment is made and none of the other items in section 960-50(6) are applicable.

Payments covered by Item 11 are to be translated to Australian currency at the exchange rate applicable at the time of the receipt or payment.

Therefore, in calculating the amount assessable under section 26AH of the ITAA 1936, comparison must be made between the cost of acquisition of the life policy translated into Australian dollars on the date you paid the policy premium, and the proceeds received on surrender of the policy translated into Australian dollars on the date you received payment of the amount.

Question 11

Alternatively, would item 11A of the table in subsection 960-50(6) of the ITAA 1997 be applicable to calculate the amount to be included in assessable income when both the original premiums and the proceeds were paid in Great British pounds?

Summary

Item 11A of the table in subsection 960-50(6) in the ITAA 1997 does not apply as item 11 is the most appropriate item.

Detailed reasoning

Item 11A of the table in section 960-50(6) of the ITAA 1997 applies only where an amount to which none of the other items apply that is neither a receipt nor a payment is to be translated to Australian currency.

In such situations, the amount is to be translated to Australian currency at an exchange rate that is reasonable having regard to the circumstances.

As item 11 applies as mentioned above, item 11A has no application.

Question 12

Regardless of whether Item 7, 11 or 11A of the table in subsection 960-50(6) of the ITAA 1997 applies, would the Commissioner exercise his discretion under subsection 26AH(8) of the ITAA 1997 to conclude that in determining the relevant amount to be included in the taxpayer's assessable income, the taxpayer should first calculate the "relevant amount" in Great British Pounds and convert to Australian dollars on the date of surrender?

Summary

The Commissioner's discretion in subsection 26AH(8) of the ITAA 1936 does not extend to the application of the items of the table in subsection 960-50(6) of the ITAA 1997.

Detailed reasoning

As mentioned above, the object of the discretion in subsection 26AH(8) of the ITAA 1936 is to ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the holder or holders of the policy exceeds the premiums paid under the policy.

Consequently, it is evident that the discretion can only apply in respect to the operation of section 26AH of the ITAA 1936 and it has no application to the foreign currency translation rules in section 960-50 of the ITAA 1997.