ATO ID 2003/481: Friendly Society Funeral Policy - change in funeral arrangements from burial to cremation
Date of decision: 8 April 2003
Year of income: Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006
Business line: Public Groups and International

Issue
Can the Tax Office authorise a friendly society to pay out any benefits of a 'funeral policy', as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), resulting from a reduction in the expected cost of funeral arrangements under the policy before the insured person's death, if they have specified arrangements for their funeral which they later vary?

Decision
No. The Tax Office has no authority to authorise a friendly society to pay out any benefits of a funeral policy before the death of the insured person, even if the insured person varies their funeral arrangements resulting in a reduction in the cost of the funeral.

Facts
A person takes out a funeral policy for their funeral expenses with a friendly society. For their funeral arrangements the insured specifies burial. The friendly society's benefit fund rules have no provision for payment of benefits under a funeral policy other than on the death of the insured person. Later, finding themselves in financial difficulty, the insured ascertains that if they vary their funeral arrangements from burial to cremation, this would result in a reduction of the funeral costs of $2,000. The friendly society agrees to the change of arrangements under the policy, but informs the policyholder that a refund of the difference in the cost of the arrangements would have to be authorised by the Tax Office.

Reasons for decision
Summary: The definition of 'funeral policy' in subsection 995-1(1) of the ITAA 1997 is a life insurance policy issued by a friendly society for the sole purpose of providing benefits to pay for the funeral of the insured person. Amounts derived by friendly societies for funeral policies issued before 1 January 2003 are exempt from taxation, provided the policies have this sole purpose. To ensure that the sole purpose of these funeral policies is maintained, friendly society funeral policy benefit fund rules usually include the following or similar conditions: Benefit funds of friendly societies are constituted by rules. The rules constitute the terms of the contract between the society and individual policy holders. As entitlement to benefits under a funeral policy is occasioned by the death of the insured person, if benefit fund rules for funeral policies included provision for payment of benefits other than on the death of the insured person, the sole purpose of the policies would be lost. The Tax Office has no authority to authorise a friendly society to refund the amount invested in a funeral policy before the death of the insured person.

Legislative references: Income Tax Assessment Act 1997 subsection 995-1(1)
Subject references: Friendly society Friendly society bonds Funeral bonds Insurance & insurance industry Life insurance policies