Edited version of private advice

Authorisation Number: 1052164377008

Date of advice: 12 October 2023

Ruling

Subject: Assessable income - life assurance policy

Question

Are the monthly payments received from your life insurance Bond (the Bond) included in your assessable income under section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

The Bond incorporates a foreign life assurance policy that the Commissioner accepts is an eligible life assurance policy for the purposes of 26AH of the Income Tax Assessment Act 1936 (ITAA 1936). Section 26AH of the ITAA 1936 provides that a taxpayer's assessable income shall include bonuses, and some other amounts in the nature of bonuses, received under an eligible policy during the eligible period. However, subsection 26AH(6) 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.

In your case, the monthly payments under the policy are regarded as reversionary bonus payments for the purposes of section 26AH, as they represent the profit or gain element passed onto you as the policyholder (Taxation Ruling IT 2346). A partial surrender of the policy has also occurred in these circumstances. These payments are then received by you, the policyholder, after the tenth year of the eligible period, being the date of the commencement of the risk under the policy. This means the payments received will not constitute assessable income under section 26AH of the ITAA 1936.

Moreover, the payments will also not be assessable income as life insurance bonuses under section 15-75 of the Income Tax Assessment Act 1997 (ITAA 1997). Further, as a bonus is typically not ordinary income, the bonus would not be included in your assessable income under subsection 6-5(2) of the ITAA 1997.

In summary, monthly cash payments received from your Bond are not included in your assessable income as they are not ordinary income or statutory income. Further, section 118-300 of the ITAA 1997 allows a capital gain to be disregarded where the capital gains tax (CGT) event happens in relation to a life insurance policy of which you are the original owner. Therefore, no CGT consequences will arise.

This ruling applies for the following periods:

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 commenced on:

1 July 20XX

Relevant facts and circumstances

You hold the Bond with a foreign life assurance policy provider.

You purchased the Bond in XX 20XX while residing in Country A.

You became a resident of Australia for taxation purposes in the year ending 30 June 20XX.

You will continue to be a tax resident of Australia for the entire ruling period.

The Bond is a life assurance policy.

You are the sole life assured and bondholder.

No additional contributions have been made or will be made to the Bond.

The Bond was invested and allows a fixed amount to be withdrawn up to a maximum of 10% of the policy.

The Bond allows for regular monthly fixed cash payments to be received by the bond holder up to a maximum of 10% each year.

You elected to receive regular monthly fixed cash amounts commencing on XX 20XX. You have continued to make monthly withdrawals since the year ending 30 June 20XX.

The foreign life assurance policy provider pays tax on the income and any gains on the fund's investments.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 26AH

Income Tax Assessment Act 1997 section 6-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 15-75