Private ruling: Taxation on surrender of life assurance policy
Published: October 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the proceeds you receive on surrender of your life assurance policy to be included in your assessable income? | A1: No.

Relevant facts and circumstances: You have a whole of life Insurance covering yourself that was taken out in 1980 with the premiums paid for you. The policy has been transferred to you and you now pay the premium. The annual premium has remained unchanged since the policy was taken out. The policy has a surrender value and you intend to surrender it and receive a lump sum payment including bonuses.

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 15-75 | Income Tax Assessment Act 1997 Section 118-300 | Income Tax Assessment Act 1936 Section 26AH

Reasons for decision: Detailed Reasoning - Assessability of proceeds as ordinary income: Section 6-5 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 on life assurance or endowment policies are not income according to ordinary concepts as they do not have the characteristics of ordinary income. These lump sum proceeds are of a capital nature. Accordingly, the lump sum proceeds received on life assurance or endowment policies are not assessable under section 6-5 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, on a life insurance policy. A reversionary bonus is one paid on maturity, forfeiture or surrender of a life insurance policy. In your case, any bonuses included in the lump sum payment you will receive will be paid on surrender of the policy, and are therefore reversionary bonuses. As such, section 15-75 of the ITAA 1997 does not apply. Also, Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in 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 before 27 August 1982, so section 26AH of the ITAA 1936 does not apply. For life and endowment policies, paragraph 8 of the Taxation Ruling IT 2346 defines a bonus as a guaranteed addition to the sum insured which is payable when the sum insured is payable. Importantly, IT 2346 explains that any amounts received as or by way of bonuses after the policy has been in force for ten or more years would not be subject to tax. In your case, you have a whole of life policy in your name, was taken out in 1980. You intend to surrender the policy and receive a lump sum payment which included a capital component and bonuses. The policy has been in place for more than 10 years before you intent to surrender it. In accordance with the principles established in IT 2346, any bonuses paid on the surrender of the policy are not assessable. Therefore, the bonus you received on the surrender of the life assurance policy you held will not be included in your assessable income 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, in specified 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 has acquired the interest in the policy for no consideration. As you were given the interest in the policy by your parents when you turned twenty-one, any capital gain or loss resulting on the surrender of your policy will be disregarded in accordance with section 118-300 of the ITAA 1997.