Private ruling: Assessable foreign insurance policy income
Date of advice: 23 January 2018
Published: May 2018
Ruling period: 1 July 2017 to 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Question and answer | If you surrender your foreign life policy for its cash value is the amount you receive assessable income? | No

Relevant facts and circumstances: You are an Australian resident for tax purposes. Your relative who lives in another country purchased a foreign life policy for you in 1988 with a large global life insurance company. Your relative remained the beneficiary until 2017 and paid all the premiums. You are the insured. In 2017 your relative transferred the policy to you. You made your spouse the beneficiary at the time of transfer. You intend to advise the insurance company that you are taking a paid up policy. You intend to surrender the policy.

Relevant legislative provisions: Section 6-5 of the Income Tax Assessment Act 1997 | Section 6-10 of the Income Tax Assessment Act 1997 | Section 10-4 of the Income Tax Assessment Act 1997 | Section 15-75 of the Income Tax Assessment Act 1997 | Part 3-1 of the Income Tax Assessment Act 1997 | Section 102-5 of the Income Tax Assessment Act 1997 | Section 118-300 of the Income Tax Assessment Act 1997 | Section 26AH of the Income Tax Assessment Act 1936

Reasons for decision: Detailed Reasoning - Reasons for Decision: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Summary: No amount of the reversionary bonus you received from the policy surrender is included in your assessable income in Australia. | Detailed Reasoning - Assessable income, resident taxpayers and foreign life policies – general: Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a resident taxpayer includes all the ordinary and statutory income they earn from all sources in or out of Australia in an income year. Amounts of ordinary income are specifically included in a taxpayer’s assessable income by the provisions of section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 specifies that an amount that is not ordinary income (and therefore not assessable under the provisions of section 6-5 of the ITAA 1997) will be assessable as an amount of statutory income if the amount is included in a taxpayer’s assessable income by another provision of the tax law. A list of the provisions that include specific amounts in a taxpayer’s assessable income is contained in section 10-5 of the ITAA 1997. The list includes a number of provisions relevant to amounts received under a life insurance policy. These are: ● section 102-5 of the ITAA 1997, which includes in your assessable income any assessable gain made when a capital gains tax (CGT) event happens to a CGT asset that you own, and ● sections 15-75 of the ITAA 1997 and 26AH of the Income Tax Assessment Act 1936 (ITAA 1936), which apply (respectively) to assess bonuses received under a life insurance policy, and to assess bonuses and other amounts received under a short-term life assurance policy. | Detailed Reasoning - Capital gains tax: The CGT provisions are contained in Part 3-1 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. In most cases the CGT asset must have been acquired on or after 20 September 1985 for the CGT provisions to apply to the asset. A life insurance policy is a CGT asset for the purposes of the CGT provisions, however, item 3 in subsection 118-300 (1) of the ITAA 1997 allows you to disregard (and therefore exclude from your assessable income) any assessable gain or loss made from a policy of life insurance that you acquired the interest in for no consideration. As you acquired the policy from your relative and did not pay for it, no amount of any gain or loss you made in relation to the surrendered sub-polices is included in your assessable income in Australia under the CGT provisions. | Detailed Reasoning - Assessment of life insurance policy bonus – sections 6-5 and 15-75 of the ITAA 1997, and 26AH of the ITAA 1936: Bonuses received under a policy of life insurance are not income according to ordinary concepts and are therefore not assessable under the provisions of section 6-5 of the ITAA 1997. However, insurance bonuses are potentially assessable to a taxpayer under the provisions of section 15-75 of the ITAA 1997, or section 26AH of the ITAA 1936. Section 15-75 of the ITAA 1997 provides: ● assessable income includes any amount received as or by way of a bonus on a life insurance policy, other than a reversionary bonus, and ● a reversionary bonus may be assessable under the provisions of section 26AH of the ITAA 1936. A bonus received under a life insurance policy is a reversionary bonus when the entitlement to the bonus only accrues upon maturity of the policy and is not payable annually. If a final bonus is applied to the policy when you surrender it and no income has previously been distributed to you we consider the bonus you will receive on surrender to be a reversionary bonus. A reversionary bonus is not assessable under the provisions of either section 6-5 or 15-75 of the ITAA 1997, but may be assessable under the provisions of section 26AH of the ITAA 1936. | Detailed Reasoning - Section 26AH of the ITAA 1936 – Bonuses and other amounts received in respect of certain short term life assurance policies: Section 26AH of the ITAA 1936 provides that a taxpayer's assessable income includes bonuses and some other amounts in the nature of bonuses that are received under an eligible policy during the eligible period . Where an amount such as a reversionary bonus is received in respect of an eligible policy but is received outside the eligible period of the policy, no amount of that bonus is included in your assessable income by the provisions of section 26AH of the ITAA 1936. The date of commencement of risk is determined by reference to the payment of premiums on the policy. Where there is only one premium paid in relation to a FLP and that premium does not relate to a particular period, the date of commencement of risk is the date of payment of that premium (subsection 26AH(1) of the ITAA 1936). For eligible policies with a date of commencement of risk after 7 December 1983, the eligible period is the first 10 years of the policy. The date of commencement of risk is therefore the date of commencement of the policy in 1988. This means the eligible period for the policy expired in 1998. You intend to surrender the policy in 2018, well after the eligible period ended. Accordingly, no amount of the reversionary bonuses you receive is included in your assessable income in Australia under of section 26AH of the ITAA 1936.

These reasons for decision accompany the Notice of private ruling .