Private ruling: Income - life insurance policy
Published: November 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are the proceeds received on the cancellation of your life insurance policy assessable income? | A1: 

Relevant facts and circumstances: You commenced an insurance policy in early 1984. You were the policy owner and the insured person under the policy. You made a full withdrawal from this plan in early 2011. You received a certain amount. You provided documentation confirming the withdrawal for your plan.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 26AH | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 118-300 | Income Tax Assessment Act 1997 subsection 118-300(1)

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you are a resident of Australia, your assessable income includes the ordinary income you derive directly or indirectly from all sources, whether in or out of Australia during the income year. Lump sum proceeds received from life assurance or endowment policies are not income according to ordinary concepts as they do not have the characteristics of ordinary income. The Courts have held that these lump sum proceeds are of a capital nature. Accordingly, the lump sum proceeds received on cancellation of your life insurance policy are not assessable under section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions about assessable income. One such provision is section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) which specifies that the assessable income of a taxpayer shall include reversionary bonuses paid on maturity, forfeiture or surrender of an eligible policy. A reversionary bonus is one where the entitlement to the bonus only accrues upon the maturity, forfeiture or surrender of the policy. An 'eligible policy' is defined as a life assurance policy in relation to which the date of commencement of risk is after 27 August 1982. Taxation Ruling IT 2346 discusses the circumstances under which bonuses paid on certain life assurance policies are assessable. IT 2346 explains that the taxation treatment of the bonuses paid on policies depends on the date of the commencement of the risk and is as follows: § if the policy or risk commenced prior to 28 August 1982, the bonuses are tax-free to the recipient. § if the policy or risk commenced after 27 August 1982 and on or before 7 December 1983, bonuses paid are tax free where the policy has been held for 4 years § if the policy or risk commenced after 7 December 1983, the bonuses are tax-free to the recipient where the policy has been held for 10 years or more. In your case, your life insurance policy was taken out in early 1984. As the policy was taken out after 27 August 1982, it is an 'eligible policy' under section 26AH of the ITAA 1936. You withdrew and cancelled the policy in early 2011 and received a lump sum payment. You held the policy for more than 10 years. In accordance with IT 2346, any bonuses paid from the withdrawal of the policy are not assessable as the commencement risk date of the policy is after 7 December 1983 and the policy was held for more than 10 years. Therefore, the lump sum payment, which included the bonuses paid under the policy, that you received on the cancellation and withdrawal of the policy is not assessable under section 26AH of the ITAA 1936. | Detailed Reasoning - Capital Gains Tax: Section 118-300 of the ITAA 1997 specifically deals with the capital gains tax consequences of life insurance policies. Subsection 118-300(1) of the ITAA 1997 provides that any capital gains and losses made on the disposal of an interest in a life insurance policy can be disregarded where the taxpayer is the original beneficial owner of the policy. As you are the original beneficial owner of the life insurance policy, the proceeds paid to you will not be subject to capital gains tax. | Detailed Reasoning - Conclusion: The proceeds received on cancellation and withdrawal of the policy are not assessable as ordinary income under section 6-5 of the ITAA 1997 or as statutory income under section 6-10 of the ITAA 1997. Further, the proceeds are not assessable under section 26AH of the ITAA 1936 and any capital gain or loss made on the cancellation and withdrawal of the policy is disregarded.

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