Edited version of private advice

Authorisation Number: 1052403383408

Date of advice: 05 June 2025

Ruling

Subject: Life assurance policy

Question 1

Does the life assurance policy meet the definition of an eligible policy as set out in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

Yes.

Question 2

Will you be assessed under section 26AH of the ITAA 1936 for any bonus that is received upon surrender of the policy?

Answer 2

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

On XX XX 20XX, you commenced a managed savings account (life assurance) policy with Company A.

The contribution amount to the policy was Country X currency of $XXXX per period.

The term of the policy was X years.

Your spouse was the life assured on the policy.

The policy contained a death benefit.

On XX XX 20XX, the policy reached maturity.

On XX XX 20XX, you surrendered the policy.

On XX XX 20XX, the value of the policy at the time of surrender was paid to you.

During the time that you held the policy, Company A changed their business name several times.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 section 26AH

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 15-75

Income Tax Assessment Act 1997 subsection 995-1(1)

Life Insurance Act 1995 section 9

Life Insurance Act 1995 section 14

Reasons for decision

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

Question 2

Taxation Ruling IT 2504 Income tax: deducibility of interest on borrowed funds - life assurance policies discusses life assurance policies, and states that bonuses received on a policy of life insurance are not income according to ordinary concepts and therefore are not assessable income under 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.

The effect of section 26AH of the ITAA 1936 is that reversionary bonuses received within 10 years from the date of commencement of risk of a policy are either wholly or partially included in assessable income. Where, however, reversionary bonuses are received more than 10 years from the date of commencement of the policy, they do not fall within the operation of section 26AH and are not included in assessable income.

In your case, the surrender of the policy occurred after it was held for more than ten years and therefore, no bonus amount will be assessable under 26AH of the ITAA 1936.