Private ruling: Assessability of life insurance proceeds
Published: November 2014
Ruling period: 1 July 2010 to 30 June 2011 | 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are any of the insurance proceeds from a Life Insurance Policy, assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: If the answer to question 1 is no, will the realisation of the policy result in a capital gain? | A2: Yes | Q3: If the answer to question 2 is yes, will the capital gains tax (CGT) exemption in section 118-300 of the ITAA 1997 apply to that capital gain? | A3: Yes

Relevant facts and circumstances: The taxpayer stated the facts as: 1. A company acted as a trustee of a Family Trust ('Trust'). In its capacity as trustee of the Trust, the company carried on a business. 2. An individual was a director of the company. 3. The company was the policy owner and beneficiary under a Life insurance policy in respect of the life of the director ('Policy'). 4. The policy documentation does not disclose whether the company was the policy holder in its capacity as trustee of the trust or in its own right. 5. The director died in mm/yyyy. 6. In mm/yyyy the Company entered voluntary administration with two administrators. 7. In mm/yyyy, the same two individuals are appointed liquidators of the company. 8. The insurer paid a sum in respect of the policy, with a further sum paid in mm/yyyy and a third sum paid in mm/yyyy. 9. The Corporate Cheque Account for the company (Administrator Appointed) for the periods ending 30 June 2011 and 30 December 2011 show deposits of those same amounts on dd/mm/yyyy and on dd/mm/yyyy. 10. Financial Statements for the 20XX income year for the Family Trust were prepared by a Tax Agent. These show insurance expenses for the 20XX and 200X income years respectively. 11. MYOB profit and loss for the period 01/07/20XX to 02/06/20YY also show insurance expenses. Assumption(s) 1. The legal owner of the Life Insurance Policy on the life of the director was the company in its capacity as trustee for the Family Trust. 2. The trustee company was the beneficiary under the life insurance in its capacity as trustee of the trust. 3. The trustee company paid the life insurance premiums in its capacity as trustee of the trust and the company has received the payments the trust is entitled to under the policy in its capacity as trustee of the trust, following the death of the director.

Relevant legislative provisions: Section 6-5 of the ITAA 1997 | Section 104-25 of the ITAA 1997 | Section 118-300 of the ITAA 1997

Reasons for decision: Summary: The payments from the Insurance Company are not assessable to that company under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes the ordinary income derived directly or indirectly from all sources. The question of whether life insurance proceeds are of an income or capital nature has been the subject of judicial deliberation over the years. In Marac Life Assurance v Commissioner of Taxation [1986] 1NZLR 694, the Court of Appeal concluded that it was common ground that traditionally proceeds of life insurance policies had been treated as capital. That decision was applied by the Federal Court in NM Superannuation Pty Ltd v Young & Anor (1993) 41 FCR 182; 7 ANZ Insurance Cases 61-163. Life insurance proceeds are not income according to ordinary concepts under section 6-5 of the ITAA 1997. | Summary: The payment of life insurance proceeds gives rise to CGT event C2. | Detailed Reasoning - Detailed reasoning: Where a life insurance policy is paid out as a lump sum, this involves a satisfaction of the holder's rights under the policy. This gives rise to CGT event C2 pursuant to section 104-25 of the ITAA 1997. | Summary: The proceeds of the life insurance policy are not assessable. | Detailed Reasoning - Detailed reasoning: Taxation Ruling No IT 155: Key Man Insurance - Assessability of proceeds and deductibility of premiums states: | Detailed Reasoning - FACTS: 3. The term 'key man' insurance is used in the industry to denote insurance on the life of a director, partner, employer or other 'key' person associated with the taxpayer in business. The types of policies involved are whole of life, endowment, term (or temporary) life assurance, sickness and accident insurance. 4. As evidenced by the rulings in paragraphs 4 to 6 of CITCM 789, it has been the practice in relation to insurance policies taken out by employers in respect of their employees to - (a) treat the premiums as non-deductible under section 51 and the proceeds as non-assessable if a life policy is involved; and (b) treat the premiums as deductible under section 51 and the proceeds as assessable income if an accident or term policy is involved. | Detailed Reasoning - RULING: 6. A review of this and other relevant cases led to the conclusion that there is no cause to depart from the practice of treating premiums on life (and endowment) policies as being non-deductible under section 51 and the proceeds as non-assessable. In this case, the Insurance policy had plan benefits of Total and Permanent Disability and Life Care (Death Cover). The policy owner is listed as the company. The ruling application states the policy was held by the trustee company in its capacity as trustee of the trust and the trustee company paid the premiums. The individual was a director of the trustee company. The payments were paid as life insurance on the individual and thus are not assessable in accordance with IT 155.

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.