Edited version of private advice

Authorisation Number: 1052363484822

Date of advice: 27 February 2025

Ruling

Subject: International investment bonds

Question 1

Does the Investment Bond you hold meet the definition of a life insurance policy as per the definition in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Is any reversionary bonus you receive on surrender of the Investment Bond assessable under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 2

No.

Question 3

When your Investment Bond is redeemed, will any capital gain you make be disregarded under section 118-300 of the ITAA 1997?

Answer 3

No.

This ruling applies for the following periods:

For the year ending 30 June YYYY

For the year ending 30 June YYYY

The scheme commenced on:

1 July YYYY

Relevant facts and circumstances

You are an Australian resident for tax purposes and moved to Australia in YYYY.

Your late spouse (X) passed away on DDMMYYYY.

In YYYY, you and late spouse jointly acquired a collective investment bond, similar to a capital investment bond known as 'X' (The Investment Bond) (Policy number X) while you were both residents of a foreign country.

The Bond was then transferred to you as the sole owner effective from DDMMYYYY.

The Investment Bond has a fixed term, and its value reflects a variety of foreign listed investment trusts.

The Investment Bond can be redeemed at any time, however unless redeemed earlier, will continue to the end of the fixed term.

The Investment Bond is not a policy taken out on the life of an individual.

Where the Investment Bond is held to the full term, there is a guaranteed reversionary bonus payable to you of at least equivalent to the amount invested (adjusted for any withdrawals or surrenders prior to redemption).

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 15-75

Income Tax Assessment Act 1997 section 102-5

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

Question 1

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) of the LIA 1995).

In this case, the Investment Bond is considered to be a life policy under the LIA 1995 and, therefore, is an eligible policy for the purposes of section 26AH of the ITAA 1936.

Question 2

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.

In your case, you acquired the Investment Bond in YYYY and any amounts you receive after YYYY are not considered assessable income under section 26AH of the ITAA 1936 as this is greater than 10 years from the commencement date of the risk.

Question 3

A capital gain or capital loss may be made if a capital gains tax (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 104-25 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 to section 118-300 of the ITAA 1997).

Taxation Determination TD 2007/4 Income tax: capital gains tax: is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression? 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).

As there is no life insured under the Bond, it is not considered 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 you make on surrender of the Bond cannot be disregarded.