ATO ID 2003/480: Friendly Society Funeral Policy - serious financial difficulties
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 benefits under a 'funeral policy', as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), before the insured person's death, where a person takes out a funeral policy and later finds themselves in financial difficulties?

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 person insured, even if they later find themselves in financial difficulties after taking out a funeral policy.

Facts
A person whose sole source of income is the age pension, takes out a funeral policy to fund their funeral expenses. 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. Some years later the insured requires medical treatment and finds they can receive this earlier as a private patient. To fund their treatment they apply to their friendly society for a payout of the benefit under the funeral policy. The friendly society advises the member that if the proceeds of their policy are to be paid out prior to death this will 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. [emphasis added] 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