Private ruling: Assessability of lump sum payments received on maturity of mortgage endowment policies
Date of advice: 29 October 2015
Published: October 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Question and answer: | Are the lump sum payments that you have received from mortgage endowments policies assessable in Australia? | No.

Relevant facts and circumstances: You are the holder of an overseas mortgage endowment policy. You and your spouse also jointly hold an overseas mortgage endowment policy. Each of these policies required regular premiums to be paid. These premiums were paid when due and not altered throughout the life of the policies. You have received no bonus payments throughout the life of the policies. All of your policies have matured. As a result of your policies reaching maturity, you have received a lump sum payment for each policy held. Any gains derived from your policies are not assessable in the country of origin. The policies have been held for a period of greater than 10 years. The policies have been held by the original owner through to maturity.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 6-5 | Income Tax Assessment Act 1997 - Section 6-10 | Income Tax Assessment Act 1997 - Section 6-15 | Income Tax Assessment Act 1997 - Section 102-20 | Income Tax Assessment Act 1997 - Section 118-300

Reasons for decision: Summary: A life assurance policy includes a policy insuring payment of money on the happening of any contingency dependant on the termination or continuance of human life (either with or without provision for a benefit under a continuous disability insurance contract with the meaning of the Life Insurance Act 1995 ). Your mortgage endowment policies fall under the definition of a life assurance policy. Therefore your policies may be referred to as life assurance/insurance policies in the following. | Detailed Reasoning - Assessability of proceeds as ordinary income: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Lump sum proceeds received from a life assurance policy are not income according to ordinary concepts as they do not have the characteristics of ordinary income. Lump sum payments are generally capital in nature. Accordingly, the lump sum payments that you have received on your mortgage endowment policies is not ordinary income and therefore are not assessable under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Assessability of proceeds as statutory income: Section 6-10 of the ITAA 1997 also includes in a taxpayer's assessable income amounts that are not ordinary income but are made assessable under another provision. These amounts are statutory income. Section 15-75 of the ITAA 1997 provides that the assessable income of a taxpayer includes any amount received as a bonus, other than a reversionary bonus. A reversionary bonus is one that is paid on maturity, forfeiture or surrender of a life insurance policy. In your case, any bonuses included in the lump sum payments you received were paid on surrender of your policies, and are thus reversionary bonuses. Therefore, the payments that you have received are not assessable under section 15-75 of the ITAA 1997. Section 26AH of the ITAA 1936 includes as assessable income certain reversionary bonuses received in respect of life assurance policies where the date of commencement of the policy is after 27 August 1982. Your policy commenced post 27 August 1982, therefore section 26AH of the ITAA 1936 may apply. Taxation Ruling No. IT 2346 Income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation , discusses the Commissioners view on the application of section 26AH of the ITAA 1936. Paragraph 8 of Income Tax Ruling IT 2346 explains that any amounts received as or by way of bonuses for policies commencing after 27 August 1982 that have been held for a period of ten or more years, falls outside the scope of section 26AH of the ITAA 1936. In your case, all of the mortgage endowment policies that you held have been surrendered in favour of lump sums and have all been held for a period of greater than 10 years. Therefore consistent with the principles established in IT 2346, any bonuses paid on the surrender of your policies falls outside the scope of section 26AH of the ITAA 1936. Accordingly, the lump sum payments that you received on the surrender of your mortgage endowment policies are not assessable under section 26AH of the ITAA 1936. | Detailed Reasoning - Capital Gains Tax (CGT) implications: Section 118-300 of the ITAA 1997 excludes from the application of the CGT provisions certain capital gains or capital losses relating to the taxpayers interests under insurance policies, under certain circumstances. The CGT exemption applies to capital gains or losses from a CGT event relating to rights under life insurance policies or annuity instruments, if the taxpayer was the original beneficial owner of the policy or instrument. As you originally commenced all of the policies including the policy that you jointly hold, any capital gain or loss resulting from the maturity of these policies will be disregarded under section 118-300 of the ITAA 1997.