ATO ID 2004/691: Assessability of lump sum payment received by resident beneficiary of a non-resident trust from foreign life assurance policy held by the trust
Date of decision: 2 August 2004
Year of income: Year ended 30 June 2000
Business line: Public Groups and International

Issue
Is a bonus received by a resident beneficiary of a non-resident trust from a foreign life assurance policy held by the trust, included in assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. A bonus received by a resident beneficiary of a non-resident trust from a foreign life assurance policy held by the trust, is not included in assessable income under section 99B of the ITAA 1936.

Facts
The taxpayer purchased capital redemption bonds in 1989 at a time when the taxpayer was a non-resident of Australia. The proceeds of the bonds were used to pay the annual premiums on a life assurance policy held by a non-resident trust. The life assurance policy is not an Australian policy and is not subject to taxation in the taxpayer's previous country of residence. The taxpayer received a lump sum payment as a beneficiary of the non-resident trust after the taxpayer became a resident of Australia. The lump sum payment comprises a bonus payable under the policy. The lump sum payment was made more than 10 years after the date of commencement of the risk and has not previously been subject to tax in Australia. The lump sum payment would not have been included in the taxpayer's assessable income had the taxpayer held the policy directly, because of the operation of section 26AH of the ITAA 1936. Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary. Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents either: 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 a relevant life assurance policy ('an eligible policy') during a specified period ('the eligible period'). An eligible policy is defined to mean a policy of life assurance in relation to which the date of commencement of risk is after 27 August 1982, while the date of commencement of risk in relation to an eligible policy is - Subsection 26AH(6) of the ITAA 1936 operates to exclude bonuses and other amounts received in respect of certain short-term life assurance policies from a resident taxpayer's assessable income if the amounts are received 10 years or more from the date of commencement of risk. As the amount was paid more than 10 years after the commencement of the risk under the policy, the lump sum payment received by the taxpayer from the life assurance policy held by the non-resident trust would not have been included in the taxpayer's assessable income under section 26AH of the ITAA 1936 had the taxpayer held the policy directly. Further, as a bonus is not ordinary income (see Taxation Ruling IT 2504), the bonus would not be included in the taxpayer's assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) had the taxpayer held the policy directly. Therefore, paragraph 99B(2)(b) of the ITAA 1936 will apply to exclude the lump sum payment from the taxpayer's assessable income. Therefore, the lump sum payment received by the resident taxpayer from a foreign life assurance policy held by a non-resident trust is not included in the taxpayer's assessable income under section 99B of the ITAA 1936.

Reasons for decision

Legislative references: Income Tax Assessment Act 1936 section 26AH section 99B subsection 99B(1) paragraph 99B(2)(b)
Related public rulings and determinations: Taxation Ruling IT 2504
Subject references: Foreign investment funds Foreign life assurance policies