Private ruling: Foreign life policy
Date of advice: 20 August 2015
Published: August 2015
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023 | Year ending 30 June 2024
Date scheme commenced: 1 July 2013

Ruling: Questions and answers | Will any reversionary bonuses paid on surrendering or otherwise ending the policy be included in your assessable income where the policy has been held for a period greater than 10 years? | No.

Relevant facts and circumstances: For X years you were a non-resident of Australia for tax purposes. You returned to Australia and resumed your Australian tax residence on dd/mm/yyyy. When you were a non-resident you invested in an insurance bond which you indicate is a foreign life insurance policy, this will be referred to as The Policy. The Policy: • was taken out in 20XX • was provided by a foreign life insurance company. • has a unique policy number. You advise that the policy was issued by a non-resident insurer, which is not authorised to carry on life insurance business in Australia. The currency of The Policy is not AUD. You advise that under the Policy, you are able to make contributions in the form of premiums of a specified sum or increased premiums at any time. As of the date of this ruling, you have made a single premium contribution. You have no intention of redeeming or otherwise surrendering The Policy within 10 years of the date of commencement of risk being the date the policy was paid for.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 108-5. | Income Tax Assessment Act 1997 Section 118-300. | Income Tax Assessment Act 1936 Section 26AH.

Reasons for decision: Detailed Reasoning - Assessability of amounts that accrue in foreign life policy: Section 6-5 of the ITAA 1997 states that assessable income consists of both ordinary income and statutory income. However, an amount of ordinary or statutory income will not be assessable income if the amount is made exempt or is otherwise excluded from assessable income. In working out whether you have derived an amount of ordinary income, and if so when you derived it, section 6-5 of the ITAA 1997 states that you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. In your case, you invested in a foreign life policy. The amounts that accrue in your foreign life policy result in changes in the value of the policy. As the amounts that accrue are not received by you or dealt with on your behalf, you have not actually received these amounts as income. Therefore, the amounts that accrue annually in your foreign life policy are not assessable as ordinary income in Australia. Furthermore, there are no provisions in the capital gains tax legislation that would operate to include these amounts as assessable capital gains. Therefore, the amounts that accrue annually in your foreign life policy are not assessable as ordinary or statutory income in Australia. | Detailed Reasoning - Assessability of reversionary bonuses: The proceeds received from the maturity of your foreign life policy are classed as a reversionary bonus. A reversionary bonus paid under a short term life policy on maturity, forfeiture or surrendered taken out after 28 August 1982 is subject to special tax treatment if the risk commenced after 7 December 1983 under section 26AH of the ITAA 1936. Subsection 26AH(2) of the ITAA 1936 states that if a reversionary bonus is received after 10 years from commencement of a life insurance policy, that the bonus received is not assessable. Subsection 26AH(13) of the ITAA 1936 states that the 10 year period is reset if the premiums in one year exceed the premiums in the previous year by more than 25%. In your case, your foreign life policy will be taken out after 28 August 1982 and will be held for more than 10 years, and you indicate to date have paid one premium up front. Therefore, the conditions of section 26AH of the ITAAA 1936 have been met and the reversionary bonus received from the maturity of the policy is not assessable income.