Private ruling: Assessability of Endowment Policy
Published: September 2012
Ruling period: The income year ended 30 June 2013
Date scheme commenced: 29 July 2012

Ruling: Q1: Are the proceeds, received in the 2012-13 year of income from the maturity of life endowment policy, to be included in your assessable income? | A1: No

Relevant facts and circumstances: You purchased a life assurance policy. The policy commenced prior to 28 August 1982 and matured during the 2012-13 year of income. You were the beneficial owner of the policy.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 26AH. | Income Tax Assessment Act 1997 section 6-5. | Income Tax Assessment Act 1997 section 118-300.

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes the ordinary income you derived from all sources. Capital gains are not ordinary income and thus are not assessable under section 6-5 of the ITAA 1997. Lump sum proceeds from life assurance or endowment policies are not ordinary income. They do not have the characteristics of ordinary income. The Courts have held that these lump sum proceeds are of a capital nature. Therefore, the general income provisions contained in Division 6 of the ITAA 1997 will not apply to include the lump sum amount in your assessable income. | Detailed Reasoning - Capital Gains Tax: Section 118-300 of the ITAA 1997 specifically deals with the capital gains tax consequences in the case of life insurance policies. It provides an exemption for gains and losses from the disposal of an interest in a life insurance policy for the original beneficial owner of the policy. Therefore no amount has to be included in the income tax return as a capital gain. | Detailed Reasoning - Annual and Terminal bonuses: The insurance proceeds or bonus amounts that are reinvested into a policy are regarded as a reversionary bonus component. Section 26AH of the Income Tax Assessment Act 1936 deals with the assessability of reversionary bonuses received under short-term insurance policies. A reversionary bonus is one where the entitlement to the bonus only accrues upon the maturity, forfeiture or surrender of the policy. In a life insurance context, the proceeds of a policy that incorporates such a bonus would be income according to ordinary concepts, as defined in the general income provisions contained in Division 6 of the ITAA 1997. Taxation Ruling IT 2346 discusses the circumstances under which bonuses paid on certain life assurance are assessable. The taxation treatment of reversionary bonuses depends on the date of the commencement of the risk. If the policy or risk commenced prior to 28 August 1982, the bonuses are tax-free to the recipient. Consequently, the bonuses you received on the maturity of these policies are tax-free.

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