Edited version of private advice

Authorisation Number: 1052313498061

Date of advice: 28 October 2024

Ruling

Subject: Investment Bonds

Question 1

When you surrender the Investment Bonds, will the proceeds be assessable income under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

When you surrender Bond A, will any capital gain be disregarded under section 118-300 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

When you surrender Bond B, will any capital gain be disregarded under section 118-300 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are the beneficiary to two discretionary trusts (The Trusts):

•                     Trust A, and

•                     Trust B.

The Trusts were settled by your parents. You parents were both residents of Country A and have both since passed away.

Neither Trust was settled under your parents' wills.

Each Trust holds an offshore investment/life insurance bond (The Investment Bonds).

The trustee of both Trusts intend to assign 50% of each Investment Bond held in each Trust to you for no consideration.

The Investment Bonds will retain their original commencement dates.

You intend to surrender the Investment Bonds assigned to you.

Thus far each year the Trusts has received a capital return of less than 5% from each Investment Bond.

As both Trusts have a trustee who is a resident of Australia for tax purposes, both Trusts are residents of Australia for tax purposes.

Trust A - Bond A

The Trustees of Trust A are you, your sibling, who is a resident of Country A, and another family member, who is also a resident Country A.

Trust A owns an offshore investment/insurance bond with Company A which comprises X segments (Bond A). It has held this bond for more than 10 years.

The premium paid for Bond A was X

The lives insured under the policy are you and your sibling.

This is not a protection/full life plan. On the death of the last live insured, the amount payable would be the Bond's value, minus any outstanding fees or charges, plus X.

Trust B - Bond B

The Trustees of Trust B are you, your sibling and another family member.

Trust B owns an investment bond with Company B (Bond B) which comprises X segments. It has held this bond for over 10 years.

The premium paid for Bond B was X

There are no lives insured under this policy. It is set up on a Capital Redemption basis with a maximum term of 99 years.

If surrendered before the 99 years have passed, then the amount paid will be whatever the policy value is at the date of encashment, currently approximately X

The product information supplied states that the features of the Bond also include the following:

•                     Bond B is an international, single premium, capital redemption portfolio bond packaged with a discounted gift trust. The funds invested are used to purchase units in funds that are linked to stock markets and cash deposits

•                     the product is designed to help mitigate a potential Inheritance Tax liability and to provide an income to the settlor in the form of capital withdrawals. Up to 5% of the initial premium can be taken annually without any immediate income tax liability

•                     once established, the bond cannot be surrendered, assigned or the income payments amended or stopped during the lifetime of the settlor

•                     the bond can continue until:

o        its value falls to zero during the settlor's lifetime

o        after the settlor's death, the value reaches the minimum value required to maintain the bond

o        the trustees or beneficiaries surrender it after the settlor's death.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 95(2)

Income Tax Assessment Act 1936 section 26AH

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-300

Income Tax Assessment Act 1997 section 995-1

Life Insurance Act 1995 section 9

Life Insurance Act 1995 section 14

Reasons for decision

Bonuses received on a policy of life insurance are not income according to ordinary concepts and are therefore not assessable income for the purposes of section 6-5 of the ITAA 1997.

However, section 15-75 of the ITAA 1997 provides that a taxpayer's assessable income includes any amount received as or by way of bonus on a life insurance policy, other than a reversionary bonus. A reversionary bonus is a bonus received on surrender or maturity of a life policy.

Section 26AH of the ITAA 1936 operates to include certain reversionary bonuses from life assurance policies in assessable income if they would not otherwise be included. However, an amount will only be assessable where an eligible policy is redeemed within 10 years of the commencement date of the risk.

Section 6 of the ITAA 1936 gives 'life assurance policy' the same meaning as 'life insurance policy' in the ITAA 1997.The definition of 'life insurance policy' in section 995-1 of the ITAA 1997 has the meaning given to the expression 'life policy' in section 9 of the Life Insurance Act 1995 (LIA 1995).

Subsection 9(1) of the LIA 1995 states that each of the following constitutes a life policy for the purposes of the 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.

Subsection 14(2) of the LIA 1995 provides that an 'investment account contract', as listed at paragraph 9(1)(f) above, is a contract that provides for benefits to be paid on death, or on a specified date, and provides for the benefits to be calculated by reference to:

•                     a running account under the contract; or

•                     units the value of which are guaranteed by the contract not to be reduced; and

•                     provides for the account to be increased (for example, by the amounts of premiums paid or interest payable).

However, a contract is not an investment account contract if it provides for the account to be reduced otherwise than by the amounts of withdrawals by the person responsible for the payment of premiums or by the amounts of charges payable under the contract (subsection 14(3)).

In this case, both Bond A and Bond B are considered to be life policies under the LIA 1995 and, therefore, are eligible policies for the purposes of section 26AH of the ITAA 1936.

However, as the commencement date of the risk for both Investment Bonds was more than 10 years ago, any proceeds received upon surrender will not be assessable under 26AH of the ITAA 1936.

Questions 2 and 3

A capital gain or capital loss may be made if a CGT event happens to a CGT asset. An interest in rights under an insurance policy is a CGT asset. The surrender of a life insurance policy gives rise to CGT event C2 (section

104-5 of the ITAA 1997).

Section 118-300 of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event happening in relation to a CGT asset that is your interest in rights under a general insurance policy, a life insurance policy or an annuity instrument is disregarded in specified circumstances.

These circumstances include where a CGT event happens to a 'policy of insurance on the life of an individual' and the taxpayer is the original owner of the policy or acquired the interest in the policy for no consideration (items 3 and 4 in the table).

Taxation Determination TD 2007/4 states that it is clear that the legislature did not intend the expression 'a policy of insurance on the life of an individual' as used in section 118-300 of the ITAA 1997 to have the same meaning as 'life insurance policy' as defined in section 995-1 of the ITAA 1997. Items 3 to 6 of subsection 118-300(1) were amended to replace the defined term 'life insurance policy' with the expression 'policy of insurance on the life of an individual'.

The Revised Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No 2) 2000 noted:

the amendments ensure that...sections 118-300 and 152-20 are restricted to those policies that qualify as life insurance policies under the current law, that is, policies of insurance that are taken out on the life of an individual.

Thus, for example, although an investment policy which does not make the death of a person an event triggering a payment may be a life insurance policy for other purposes of the ITAA 1997, it is not a 'policy of insurance on the life of an individual' for the purposes of section 118-300 of the ITAA 1997 (paragraph 16 of TD 2007/4).

Bond A

As Bond A has a life insured, and you will acquire your interest in the Bond for no consideration, any capital gain or loss made on surrender of Bond A will be disregarded under section 118-300 of the ITAA 1997.

Bond B

As there is no life insured under Bond B, it is not a 'policy of insurance on the life of an individual' for the purposes of section 118-300 of the ITAA 1997.

Therefore, any capital gain or loss made on surrender of Bond B cannot be disregarded.

The first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if:

a)            you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from CGT event D1 happening, or another entity doing something that did not constitute a CGT event happening, or

b)            some or all of the expenditure you incurred to acquire it cannot be valued, or

c)            you did not deal at arm's length with the other entity in connection with the acquisition.

In your case, the first element of the cost base of Bond B will be its market value at the time you acquire it from the Trustee.