Private ruling: Life insurance bonuses and policies
Date of advice: 20 November 2025
Published: 5 January 2026
Ruling period: DD MM YYYY to DD MM YYYY

Ruling: Q1: Will the Policy be a 'life insurance policy' within the meaning of subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Must the Trustee include, as an amount of assessable income in the calculation of the net income of the Unit Trust for the purposes of subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936), the whole or any part of the Cash Value received on its Policy pursuant to section 15-75 of the ITAA 1997? | A2: No. | Q3: Must the Trustee include, as an amount of assessable income in the calculation of the net income of the Unit Trust for the purposes of subsection 95(1) of the ITAA 1936, the whole or any part of the Cash Value received on its Policy if it is received after the 'eligible period' as defined in subsection 26AH(1) of the ITAA 1936? | A3: No. | Q4: If the premium payable by the Trustee in relation to an assurance year exceeds the premium payable in the immediately preceding assurance year by more than 25%, will the 10 year eligible period in respect of the Policy be deemed by application of subsection 26AH(13) of the ITAA 1936 to have commenced at the beginning of the year in which the premium was increased, rather than at the date of commencement of risk in respect of the Policy? | A4: Yes. | Q5: Will increases in the value of assets which are recognised in the Segregated Assets Plan (SAP) established for the Policy be included as assessable income in the calculation of the net income of the Unit Trust for the purposes of subsection 95(1) of the ITAA 1936? | A5: No. | Q6: Can the Trustee disregard a capital gain or capital loss in respect of CGT event C2 under section 104-25 of the ITAA 1997 upon the total surrender or partial surrender of the Policy, pursuant to section 118-300 of the ITAA 1997? | A6: Yes. Issue 2 - Taxation of Unit Holders | Q7: Will the cost base or reduced cost base of the units in the Unit Trust (Units) be reduced pursuant to subsection 104-70(6) of the ITAA 1997 if a unit holder in the Unit Trust (Unit Holder) receives from the Trustee the whole or any part of a distribution on those Units which is referrable to the Cash Value received by the Trustee? | A7: No. | Q8: Will a non-resident Unit Holder be subject to capital gains tax under Part 3-1 of the ITAA 1997 upon disposal of their Unit or receipt from the Trustee of a distribution on their Unit? | A8: No. Issue 3 - Part IVA | Q9: Will the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply in respect of either: • the acquisition of a Policy by the Trustee; or • the acquisition of Units by a Unit Holder? | A9: No.

Relevant facts and circumstances: The Trustee and the Unit Trust The Unit Trust is an open-ended wholesale multi-class Australian domiciled unit trust. The Units are only available to Wholesale Clients as defined under section 761G of the Corporations Act 2001 . The Units will be issued to a wide variety of investors, including individuals and complying superannuation funds. The Unit Trust provides investors with a gateway to access a broad range of investment options in the United States (US) and other jurisdictions. The investment structure involves the Unit Trust acquiring a private placement life insurance policy which is linked to the SAP established for the policy. Investor moneys are allocated to the Investment Options offered under the SAP established for the policy. Unit Holders do not own equal proportions of the total assets of the Unit Trust. Rather, the values are determined by reference to the value attributable to the underlying Investment Options selected by the Unit Holder. The Policy Company A is a life insurance company organised under the laws of a foreign jurisdiction. Company A issues life insurance policies to policyholders. The Policy is a Group Variable Life Assurance Policy under which a number of lives are covered for whom the policyholder has an insurable interest and receives a benefit payable on the death of each life named under the Policy. The Policy will cover the life of a number of individuals who are non-US persons who will be nominated either by Unit Holders or provided by the Trustee from a pre-approved pool of lives (each, an Assured). The Policy is a 'variable' policy because the value of the Policy will increase or decrease depending on the performance of the underlying Investment Options selected. Policyholders are known as Policy Owner(s) or Owner(s) under the Policy. Acquisition of Policy The Trustee will acquire one or more of the Policy issued by Company A and will therefore be the policyholder and owner of the Policy(s). The Unit Trust does not own land or an interest in land in Australia, nor does it intend to acquire such interests. The Policy is non-participating. It does not give the Trustee (as policyholder) a right to share in the profits of Company A nor any dividends. No annual bonuses are paid to the policyholder. P o li cy Premium A policyholder can elect to make a single premium payment in respect of each Assured. As the number of Assureds is expected to be large, the total premium payable to Company A will be significant. The single premium will be due to be paid to Company A on the date coverage of the life of the Assured begins. Alternatively, the policyholder can elect to make a series of premium payments in respect of the SAPs which are established at the time the Policy is issued. The premium(s) received for the Policy will be credited to the applicable SAP established for the Policy. SAP In accordance with the legislation of the foreign jurisdiction, Company A will establish a SAP for each and every policy that is issued. A SAP is an account, separate and distinct from any other asset or liability of Company A, which relates to an identifiable pool of assets and liabilities. A SAP and all the assets of a SAP are the property of Company A and are not owned by the policyholders who have no legal or beneficial interest in any asset held in the SAP. No claim against the SAP of this Policy may be paid from the general account of Company A or from the assets of another SAP that is not linked to this Policy. At the time a Policy and its associated SAP is established, Company A will appoint investment adviser(s) and custodians and establish investment policy statement(s) for the SAP based upon nominations made by the policyholder in the application for the Policy. The custodian's role is limited to holding the assets of the Unit Trust. SAPV The value of the SAP (Segregated Assets Plan Value or SAPV) will be determined by the premium(s) credited plus investment income and realised/unrealised gains less fees and charged applied. A separate account will be maintained by Company A in respect of each Assured (Assured Sub-Account) and the value of the Assured Sub-Account (Assured Sub-Account Value) will be based upon the allocated premium of each Assured relative to the total premium. The sum of the Assured Sub-Account Value for all Assureds will be equal to the SAPV. The following expenses incurred by Company A will be deducted from the SAPV of each SAP: • the Administration Expense, Cost of Insurance and other expenses, if any, as determined under the terms of the Policy and due to Company A and collected at the periodic interval defined in the Policy; • investment advisory, custodian and transaction charges associated with the management of the investments held in the SAP for the Policy; and • ; any other third-party expenses directly attributable to the Policy and its SAP. The Cost of Insurance is a charge equal to the sum of the Assured Cost of Insurance charged for all Assureds under the Policy. In general terms the Assured Cost of Insurance is the mortality charge based upon the Assured Net Amount at Risk and is determined by reference to the gender, attained age of that person and other underwriting factors. Policy Loans After the first anniversary of the issue of the Policy, the policyholder may request a loan under the terms of the Policy (Policy Loan) where a portion of the SAPV will be liquidated and held in a separately identified account (Loan Collateral Account) as collateral for the Policy Loan made to the policyholder by Company A. The policyholder will pay interest on the Policy Loan. The sum of all the unpaid Policy Loans and accrued and unpaid interest thereon is the 'Outstanding Policy Debt'. Under the general terms of the Policy, there are limits on the amount of the Outstanding Policy Debt (relative to the Net Surrender Value). The Standard Endorsement also limits the Outstanding Policy Debt to an amount to ensure there is sufficient liquidity in the Assured Sub-Accounts to cover the life expectancy of the Assureds. Company A will credit interest based upon the Loan Collateral Account balance and the value of the Loan Collateral Account will be equal to the Policy Loan principal amount plus the interest credited thereon. The SAPV at any particular time will be equal to the value of the investments held in the SAP plus the value of the Loan Collateral Account at that time. Death Benefit A death benefit is payable upon the death of each Assured under the Policy (Assured Death Benefit). Company A will pay the Assured Death Benefit to the policyholder or any other person(s) nominated as a beneficiary upon the death of an Assured (Beneficiary). Under the Policy, there is an option used to determine the Assured Death Benefit as selected by the policyholder (Death Benefit Option) and subsequently shown in the Declaration Page of the Policy. Only a single Death Benefit Option may be selected at any one time which will apply to determine the Death Benefit for all Assureds under the Policy. The Trustee has chosen the Death Benefit Option where the total death benefit payable under the Policy (Death Benefit) will equal the SAPV and the Specified Amount and where the Assured Death Benefit will equal the Assured Sub-Account Value plus the Assured Specified Amount. Maturity Date The Assured Maturity Date is the date as shown in the Declaration Page of the Policy on which the Assured Sub-Account Value if that Assured is still living will be paid out. The Assured Maturity Date may be extended upon the request of the policyholder. The Maturity Date means the latest Assured Maturity Date as shown in the Declaration Page of the Policy (or as modified by an endorsement attached to the Policy), on which the Policy terminates if the Assured is still living and at which time the Assured Sub-Account Value (which will be equal to the SAPV of the Policy at that time) will be paid. The Maturity Date may be extended upon the request of the policyholder. Surrender and Withdrawal The Policy provides for withdrawals (Assured Withdrawal), partial surrender (Assured Surrender) and total surrender (Surrender) of the Policy by the policyholder where eligibility conditions are satisfied and subject to the Standard Endorsement (discussed further below). Withdrawal An Assured Withdrawal is a withdrawal from the Policy during the lifetime of a designated Assured of less than the Assured Sub-Account Value which will reduce the Assured Surrender Value (ASV), SAPV and may reduce the Death Benefit subject to the Death Benefit Option elected. The ASV is the maximum amount payable upon either cumulative Assured Withdrawals or an Assured Surrender and is calculated as the Assured Sub-Account Value less any apportioned accrued and unpaid periodic deduction, Withdrawal Charge or Surrender Charge, and any apportioned accrued and unpaid Costs Attributable to the Policy. The Assured Net Surrender Value is the ASV less any apportioned Outstanding Policy Debt. Under the Standard Endorsement, an Assured Withdrawal is only permitted after the 11 th anniversary of the date the Policy is issued. An Assured Withdrawal is also subject to limits to ensure there is sufficient liquidity in the Assured Sub-Account to cover the life expectancy of the Assured. Assured Surrender An Assured Surrenderis a surrender by the policyholder of all rights under the Policy prior to the Maturity Date during the lifetime of a designated Assured, at which time the ASV is determined and paid to the policyholder. Under the Standard Endorsement, an Assured Surrender is permitted after the 1 st anniversary of the date the Policy is issued. Surrender A Surrender means a voluntary return of the Policy to Company A and the concurrent surrender by the policyholder of all rights under the Policy prior to the Maturity Date, at which time the Surrender Value is determined and paid to the policyholder. Under the Standard Endorsement, a Surrender is permitted after the 1 st anniversary of the date the Policy is issued. The Surender Value is the SAPV less any accrued and unpaid periodic deduction, Withdrawal Charge or Surrender Charge, and any accrued and unpaid Costs Attributable to the Policy. The Net Surrender Value is the Surrender Value less any Outstanding Policy Debt. Cash Value For the purposes of this ruling, 'Cash Value' refers to payments to the policyholder upon the occurrence of any of the following events: • Death of an Assured; • Maturity Date; • Assured Surrender; • Surrender; or • Assured Withdrawal. Assumptions 1. The Policy to be acquired by the Trustee will be identical in all material aspects to the Policy that was provided to the ATO as part of the ruling application. 2. For the purposes of Question 8 of this ruling: • Just before the disposal of any Units by a non-resident Unit Holder, the Trustee will not own assets that are taxable Australian real property ( TARP ) of such an amount so as to cause the Units in the Unit Trust to satisfy the principal asset test ( PAT ) under subsection 855-30(2) of the ITAA 1997. • No non-resident Unit Holder will use the Units in carrying on a business through a permanent establishment in Australia so that the Units will not be taxable Australian property ( TAP ) under category 3 of the table in section 855-15 of the ITAA 1997. • The choice under subsection 104-165(3) of the ITAA 1997 will not be relevant to a non-resident Unit Holder or, if relevant, will not be exercised, so that the Units will not be TAP under category 5 of the table in section 855-15 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 26AH | Income Tax Assessment Act 1936 subsection 26AH(1) | Income Tax Assessment Act 1936 subsection 26AH(6) | Income Tax Assessment Act 1936 subsection 26AH(13) | Income Tax Assessment Act 1936 subsection 95(1) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 15-75 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 paragraph 104-25(1)(b) | Income Tax Assessment Act 1997 subsection 104-25(3) | Income Tax Assessment Act 1997 section 104-70 | Income Tax Assessment Act 1997 paragraph104-70(1)(b) | Income Tax Assessment Act 1997 subsection 104-70(6) | Income Tax Assessment Act 1997 paragraph 104-71(1)(db) | Income Tax Assessment Act 1997 subsection 104-160(1) | Income Tax Assessment Act 1997 subsection 104-165(3) | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 section 118-300 | Income Tax Assessment Act 1997 subsection 118-300(1) | Income Tax Assessment Act 1997 subsection 118-300(1A) | Income Tax Assessment Act 1997 subsection 118-300(2) | Income Tax Assessment Act 1997 Division 855 | Income Tax Assessment Act 1997 section 855-10 | Income Tax Assessment Act 1997 section 855-15 | Income Tax Assessment Act 1997 section 855-20 | Income Tax Assessment Act 1997 section 855-25 | Income Tax Assessment Act 1997 section 855-30 | Income Tax Assessment Act 1997 subsection 855-30(2) | Income Tax Assessment Act 1997 subsection 995-1(1) | Life Insurance Act 1995 subsection 9(1) | Life Insurance Act 1995 paragraph 9(1)(a) | Life Insurance Act 1995 paragraph 9(1)(g) | Life Insurance Act 1995 subsection 14(4) | Corporations Act 2001 section 761G

Reasons for decision: Detailed Reasoning - Question 1: Will the Policy be a 'life insurance policy' within the meaning of subsection 995-1(1)? | Summary: Yes. The Policy is a 'life policy' under the Life Insurance Act 1995 (LIA 1995) and is therefore a 'life insurance policy' under subsection 995-1(1). | Detailed Reasoning - Detailed reasoning: ' Life insurance policy' is defined in subsection 995-1(1) to have the meaning given to the expression 'life policy' in the LIA 1995. Subsection 9(1) of the LIA 1995 defines a 'life policy' to include: (a) a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life; (g) a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract . | Detailed Reasoning - Contract of insurance - paragraph 9(1)(a): The definition of a 'life policy' in paragraph 9(1)(a) of the LIA 1995 is similar to the common law meaning of 'life insurance policy' which is mentioned in paragraph 18 of Taxation Determination TD 2007/4 Income tax: capital gains tax: is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression? (TD 2007/4) as a policy: ... where one party agrees to pay a given sum upon the happening of a particular event (contingent upon the duration of human life) in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another. The Policy is a contract of insurance that provides a death benefit upon the death of a person. Under the Policy, on the death of each Assured, the Assured Death Benefit will be paid to the Unit Trust or the Beneficiary. Therefore, the Policy is a life insurance policy under the common law meaning and also a 'life policy' under paragraph 9(1)(a) of the LIA 1995. | Detailed Reasoning - Investment-linked contract - paragraph 9(1)(g): Subsection 14(4) of the LIA 1995 defines an 'investment-linked contract' as a contract: (a) the principal object of which is the provision of benefits calculated by reference to units the value of which is related to the market value of a specified class or group of assets of the party by whom the benefits are to be provided; and (b) that provides for benefits to be paid: i. on death; or ii. on a specified date or specified dates or on death before the specified date, or the last of the specified dates, as the case may be. Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation (IT 2346) describes an 'investment-linked policy' as follows: A contract providing a death benefit, and an investment account the value of which is directly linked to the performance of a specific investment portfolio. The value of the policyholder's interest will rise and fall with the movements in the value of the portfolio. Source: Life Insurance Commissioner Annual Report 1985 The value of the benefits provided to the policyholder under the Policy are based on the underlying investments referrable to the value of the SAP (i.e. the SAPV). Therefore, the Policy is an investment-linked contract and also a life policy under paragraph 9(1)(g) of the LIA 1995. In summary, the Policy is a life insurance policy for the purposes of subsection 995-1(1) because it is a life policy under both paragraphs 9(1)(a) and 9(1)(g) of the LIA 1995. | Detailed Reasoning - Question 2: Must the Trustee include, as an amount of assessable income in the calculation of the net income of the Unit Trust for the purposes of subsection 95(1) of the ITAA 1936, the whole or any part of the Cash Value received on its Policy pursuant to section 15-75? | Summary: Section 15-75 only assesses amounts received as or by way of a bonus on a life insurance policy, other than a reversionary bonus. Since all bonuses received under the Policy will be a reversionary bonus, no part of the Cash Value received by the Trustee will assessable under section 15-75. | Detailed Reasoning - Section 15-75: Section 15-75 provides that a taxpayer's assessable income includes any amount received as or by way of 'bonus' on a life insurance policy, other than a 'reversionary bonus'. The term 'bonus' is not defined in either the ITAA 1936 or ITAA 1997 but is explained at paragraphs 8 and 9 of IT 2346 in the context of 'unbundled policies' and 'more traditional policies.' For more traditional policies (e.g. endowment policies), a bonus is a 'guaranteed addition to the sum insured which is payable when the sum insured is payable' and represents both 'a form of participation by the policyholder in the issuing company's profits' and 'a share in the surpluses derived by the issuing company during the period the policy is in force'. An unbundled policy is a life assurance policy which is categorised as either an investment account or investment-linked policy. As mentioned, the Policy is an investment-linked policy where the proceeds of the policy is directly linked to the performance of an investment portfolio. Paragraph 9 of IT 2346 explains that in the case of unbundled policies: ...the concept of bonuses representing the profit passed on to the policyholder is maintained for the purposes of section 26AH. For example, where a policy is linked to the purchase and sale of investment units, the profit derived on the sale of those units is, when paid to the policyholder, regarded as a payment by way of a bonus... The portion of the Cash Value comprising an adjustment for earnings referable to the Investments held in the SAP and received by the Trustee is considered to be a bonus. This amount provides the Trustee with participation in profits of Company A, as derived from the performance of the Investments held in the SAP relating to the Unit Trust's Policy (but owned by Company A) during the period the Policy is in force. 'Reversionary bonus' is also an undefined term under the ITAA 1936 and ITAA 1997. The Macquarie Dictionary defines a 'reversionary bonus' as 'a periodic free addition to the sum insured under a life insurance policy, made from surplus earned on the insurer's investments'. It is also understood that a reversionary bonus is a bonus which is paid on the maturity, forfeiture or surrender of a policy. Under the Policy, no annual bonuses are paid to policyholders. Instead, bonuses are only paid when the Cash Value is paid to the Trustee which occurs on the death of an Assured or maturity, withdrawal, partial surrender or total surrender of the Policy. Therefore, all bonuses paid under the Policy will be reversionary bonuses. Reversionary bonuses on life insurance policies are excluded from the operation of section 15-75. According to the note to section 15-75, reversionary bonuses are covered by section 6-5 if they are ordinary income and, if not, by section 26AH of the ITAA 1936. Since all bonuses received under the Policy will be a reversionary bonus, no part of the Cash Value received by the Trustee will assessable under section 15-75. | Detailed Reasoning - Question 3: Must the Trustee include as an amount of assessable income in the calculation of the net income of the Unit Trust for the purposes of subsection 95(1) of the ITAA 1936, the whole or any part of the Cash Value received on its Policy if it is received after the 'eligible period' as defined in subsection 26AH(1) of the ITAA 1936? | Summary: Any whole or part of the Cash Value that is received by the Trustee on the Policy after the 'eligible period' as defined in subsection 26AH(1) of the ITAA 1936 is not assessable to the Trustee as a bonus under section 26AH of the ITAA 1936 or any other statutory provision. The Cash Value received by the Trustee will also be a receipt of proceeds from a life insurance policy which is not ordinary income, is exempt from capital gains under subsection 118-300(1) and not otherwise assessable under any other statutory provision. | Detailed Reasoning - Receipt of insurance proceeds not assessable as ordinary income or under Part 3-1: As explained in ATO ID 2003/1189 Income Tax: CGT: buy - sell (business succession) agreement - life insurance proceeds - income or capital?, proceeds of life insurance policies payable on the death of the insured person: • are not ordinary income under section 6-5 since they are capital in nature: see Marac Life Assurance Ltd v. Commissioner of Taxation [1986] 1 NZLR 694 ( Marac Life Assurance ). The decision in Marac Life Assurance was applied by the Federal Court of Australia in NM Superannuation Pty. Ltd. v. Young & Anor (1993) 41 FCR 182; (1993) 7 ANZ Insurance Cases 61-163; and • is regarded as a capital receipt since the payment is to replace the capital asset (i.e. human life) and can be statutory income if included in assessable income by another provision such as the CGT provisions. Section 118-300 disregards capital gains and losses made from certain CGT events happening in relation to an entity's interest in a 'life insurance policy'. Specifically, item 3 of the table in subsection 118-300(1) provides that a capital gain or capital loss made from certain CGT events (listed under subsection 118-300(2)) happening in relation to 'a policy of insurance on the life of an individual' is disregarded where one of the specified CGT events happens to the original owner of the policy (other than the trustee of a complying superannuation entity). The expression 'policy of insurance on the life of an individual' in section 118-300 is not defined in the ITAA 1997. According to TD 2007/4, the meaning to be given to the expression includes, but is not limited to, life insurance policies within the common law meaning of that term. As previously stated (at Question 1 of this ruling), the Policy is a life insurance policy under the common law meaning and therefore is a 'policy of insurance on the life of an individual' for the purposes of section 118-300. The Trustee will be a policyholder and also the original owner of the Policy since it will purchase the Policy from Company A. Therefore, the exemption in subsection 118-300(1) can apply to a payment to the Trustee in respect of its Policy if it gives rise to one of the CGT events listed in subsection 118-300(2) which includes CGT events A1 and C2. Under subsection 108-5(1), a 'CGT asset' is any kind of property or a legal or equitable right that is not property. Under the Policy, the contractual rights of the policyholder include the right to receive payment of the Cash Value on the death of an Assured or maturity, withdrawal, partial surrender or total surrender of the Policy. These are legally enforceable rights and therefore a CGT asset. When the Trustee receives the Cash Value, CGT event C2 will happen since its ownership of those contractual rights will be discharged or satisfied. A policyholder would usually make a capital gain from this CGT event if their capital proceeds from the ending of their contractual rights is more than the asset's cost base, or alternatively, a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). However, since CGT event C2 is one of the specific CGT events listed in subsection 118-300(2), any capital gain or loss will be exempt if CGT event C2 happens in relation to a life insurance policy held by an original owner. Therefore, the whole of the Cash Value will be exempt from CGT under subsection 118-300(1), regardless of when the Cash Value is paid. | Detailed Reasoning - Taxation of bonuses under section 26AH: Bonuses received on life insurance policies, like proceeds of life insurance policies, are not generally income according to ordinary concepts and are addressed by specific statutory provisions. As discussed (at Question 2 of this ruling), reversionary bonuses are not assessable under section 15-75 and are covered by section 26AH of the ITAA 1936. Section 26AH of the ITAA 1936 includes in the assessable income of the recipient bonuses and other amounts received in respect of certain short-term life assurance policies. | Detailed Reasoning - 'Eligible policy': Section 26AH of the ITAA 1936 applies to an 'eligible policy' which is defined in subsection 26AH(1) of the ITAA 1936 to mean a 'life assurance policy' in relation to which the 'date of commencement of risk' is after 27 August 1982, other than a 'funeral policy' (as defined in the ITAA 1997) issued on or after 1 January 2003. 'Life assurance policy' is defined in subsection 6(1) of the ITAA 1936 to have the same meaning given to 'life insurance policy' in the ITAA 1997. Since the Policy is a 'life insurance policy' within the meaning of subsection 995-1(1), it is therefore also a 'life assurance policy' for the purposes of section 26AH of the ITAA 1936. The Policy is not a 'funeral policy' as defined under subsection 995-1(1), which is a life insurance policy issued by a friendly society for the sole purpose of providing benefits to pay for the funeral of the insured person. The 'date of commencement of risk' is defined in subsection 26AH(1) of the ITAA 1936 and means the date of commencement of the period in respect of which the first or only premium paid under the policy was paid or, if the first or only premium was not paid in respect of a period, the date on which that premium was paid. The date of commencement of risk of the Policy is after 27 August 1982. Therefore, the Policy is an 'eligible policy' for the purposes of section 26AH of the ITAA 1936. | Detailed Reasoning - Eligible period: The 'eligible period' in relation to an 'eligible policy' is defined under subsection 26AH(1) of the ITAA 1936 as the period of 10 years commencing on the date of commencement of risk of the policy. If the Trustee, as policyholder, receives a reversionary bonus within the 'eligible period', it will include in its assessable income in the year of receipt of that bonus a percentage of the amount received (known as the relevant amount) in accordance with subsection 26AH(6) of the ITAA 1936 being: • the amount equal to the relevant amount if it is received during the first 8 years of the eligible period; • two-thirds of the relevant amount if it is received during the 9 th year of the eligible period; or • ; one-third of the relevant amount if it is received during the 10 th year of the eligible period. If the Trustee receives the reversionary bonus after the eligible period, no part of the reversionary bonus is assessable under section 26AH of the ITAA 1936 or any other statutory provision. Therefore, the Trustee is not required to include any amount in the assessable income of the Unit Trust in respect of any whole or any part of the Cash Value that is received on their Policy, if it is received after the eligible period (i.e. after the 10 th year from the commencement of risk). This is on the basis that: • any such payment will be proceeds from a life insurance policy which is not ordinary income, is exempt from capital gains under subsection 118-300(1) and is not otherwise assessable under any other statutory provision; and • to the extent that any such payment comprises a reversionary bonus, it is not assessable under section 26AH of the ITAA 1936 or any other statutory provision. | Detailed Reasoning - Question 4: If the premium payable by the Trustee in relation to an assurance year exceeds the premium payable in the immediately preceding assurance year by more than 25%, will the 10 year eligible period in respect of the Policy be deemed by application of subsection 26AH(13) of the ITAA 1936 to have commenced at the beginning of the year in which the premium was increased, rather than at the date of commencement of risk in respect of the Policy? | Summary: Yes. | Detailed Reasoning - Detailed reasoning: Where the premium payable by a policyholder in relation to an assurance year exceeds the premium payable in the immediately preceding assurance year by more than 25%, the 10 year eligible period in respect of the policy is deemed by application of subsection 26AH(13) of the ITAA 1936 to have commenced at the beginning of the year in which the premium was increased, rather than at the date of commencement of risk in respect of the eligible policy. Where the premium payable by the policyholder in relation to each assurance year does not exceed the premium payable in the immediately preceding assurance year by more than 25%, the 10 year eligible period in respect of the policy, for the purposes of the application of subsection 26AH(6), continues to run from the date of commencement of risk in respect of the eligible policy. | Detailed Reasoning - Question 5: Will increases in the value of assets which are recognised in the SAP established for the Policy be included as assessable income in the calculation of the net income of the Unit Trust for the purposes of subsection 95(1) of the ITAA 1936? | Summary: Since the Trustee has no legal or equitable right to any asset held in the SAP established for the Policy, any accretions to such assets are not included in the assessable income of the Trustee and therefore does not form part of the net income of the Unit Trust under subsection 95(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: The Trustee has no legal or equitable right to the assets held in the SAP established for the Policy. They are owned by Company A. Any amounts which are recognised by Company A as an increase to the SAP established for the Policy are not amounts to which the Trustee is entitled to at the time of recognition. There is no legal right in the Trustee to receive all or any part of those allocations. Any increase in the value of assets which are recognised as an increase in the SAP are bonuses that merely accrue so as to increase the amount ultimately payable to the policyholder. Section 26AH of the ITAA 1936 only applies to amounts actually received as or by way of a bonus. Paragraph 7 of IT 2346 makes it clear that the mere crediting of a bonus to an account is not taken to be the receipt of a bonus. There is no legal right in the Trustee to receive any part of those allocations until a Cash Value payment occurs whereupon a payment will be made from those accounts. Therefore, any increases in the values of assets recognised in the SAP established for the Policy are not bonuses received by the policyholder and are not subject to taxation under subsection 26AH(6) of the ITAA 1936 or any other provision of the ITAA 1936 and ITAA 1997. | Detailed Reasoning - Question 6: Can the Trustee disregard a capital gain or capital loss in respect of CGT event C2 under section 104-25 of the upon the total surrender or partial surrender of the Policy, pursuant to section 118-300? | Summary: While the partial or total surrender of the Policy will give rise to CGT event C2 for the Trustee, any capital gain or capital loss is disregarded under subsection 118-300(1). | Detailed Reasoning - Detailed reasoning: Under the Policy, the contractual rights of a policyholder includes the right to receive payment (i.e. the Cash Value) on the maturity, withdrawal, partial or total surrender of the Policy or death of the Assured. These are legally enforceable rights and therefore a CGT asset. Therefore, the receipt of a payment as a result of the partial or total surrender of the Policy will give rise to CGT event C2 under paragraph 104-25(1)(b) for the Trustee since its ownership of those contractual rights will be discharged or satisfied. As discussed in Question 3 of this ruling, item 3 of the table in subsection 118-300(1) disregards a capital gain or capital loss that arises from CGT event C2 in relation to a 'policy of insurance on the life of an individual' and the policyholder is the original owner of the policy (other than the trustee of a complying superannuation entity). As discussed, the Trustee is the original owner of the Policy which is also a policy of insurance on the life of an individual. Therefore, where the Trustee receives a payment on the partial or total surrender of the Policy, any capital gain or capital loss resulting from CGT event C2 will be exempt under subsection 118-300(1). | Detailed Reasoning - Question 7: Will the cost base or reduced cost base of the Units be reduced pursuant to subsection 104-70(6) if a Unit Holder receives from the Trustee the whole or any part of a distribution on those Units which is referrable to the Cash Value received by the Trustee? | Summary: The cost base or reduced cost base of the Units is not required to be reduced under subsection 104-70(6) if the Unit Holder receives a payment from the Trustee that is in whole or in part attributable to the Cash Value received by the Trustee. This is on the basis that such a payment does not constitute a 'non-assessable part' under paragraph 104-71(1)(db) since it is a payment to which subsection 118-300(1A) applies. | Detailed Reasoning - Detailed Reasoning: Under section 104-70, CGT event E4 happens when a payment is made by a trustee of a trust to a taxpayer in respect of the taxpayer's unit or interest in the trust and some or all of that payment (the 'non-assessable part') is not included in the assessable income of the taxpayer. CGT event E4 may apply to any distribution by the Trustee to the Unit Holder that is attributable in whole or in part to the Cash Value received by the Trustee. This is on the basis that the Cash Value is non-assessable income of the Trustee which when distributed results in the payment to the Unit Holders of an amount that is not included in their assessable income. As previously discussed, the Cash Value is non-assessable income of the Trustee on the basis that: • it consists of proceeds from a life insurance policy which is not assessable as ordinary income, is exempt from capital gains under subsection 118-300(1) and is not otherwise assessable under any other statutory provision; and • to the extent it consists of a reversionary bonus, it is not assessable as ordinary income, or under section 26AH of the ITAA 1936 if it is received after the eligible period, or under any other statutory provision. If CGT event E4 applies and the sum of the non-assessable part is greater than the cost base of each Unit, a capital gain is made. If a capital gain is made, the cost base and reduced cost base of each Unit is reduced to nil and the capital gain is the amount equal to the excess of the non-assessable part over the cost base or reduced cost base. If the sum of the non-assessable part is not greater than the cost base of each Unit, the cost base and reduced cost base is reduced by that sum. However, in this instance, certain provisions apply to prevent CGT event E4 from happening which is explained further below. | Detailed Reasoning - Non-assessable part: One of the conditions to CGT event E4 happening is that under paragraph 104-70(1)(b) there must be a non-assessable part. Paragraph 104-71(1)(db) provides that a payment to which subsection 118-300(1A) applies is disregarded in working out the non-assessable part for the purpose of section 104-70. | Detailed Reasoning - Subsection 118-300(1A): Subsection 118-300(1A) applies to disregard a capital gain or capital loss from a CGT event happening when: • a beneficiary of a trust receives a CGT asset (such as a payment) from the trustee of the trust; and • the CGT asset is attributable to another CGT event and CGT asset to which item 3 of the table in subsection 118-300(1) applies for the trustee. As discussed (at Questions 3 and 6 of this ruling), item 3 of the table in subsection 118-300(1) applies to disregard any capital gain or capital loss the Trustee makes in respect of any payment received upon the happening of CGT event C2 on the maturity, withdrawal, partial surrender or total surrender of the Policy or death of an Assured. This is on the basis the Trustee is the original owner of the Policy and is not the trustee of a complying superannuation entity. Accordingly, when a Unit Holder receives a distribution from the Trustee that is in whole or in part attributed to the Cash Value received by the Trustee under the Policy, that payment is a payment to which subsection 118-300(1A) applies. As a result, the payment that is in whole or in part attributed to the Cash Value is disregarded as a non-assessable part pursuant to paragraph 104-71(1)(db) and CGT event E4 does not happen. Accordingly, there will be no reduction required to the cost base or reduced cost base of the Units as a consequence of the Unit Holder receiving such a distribution from the Trustee. | Detailed Reasoning - Result the same if Unit Holder is the trustee of a complying superannuation fund: The same outcome applies where the Unit Holder is the trustee of a complying superannuation fund. Although the CGT exemption applying to life insurance policies under item 3 of the table in subsection 118-300(1) does not apply where the original owner of a policy is the trustee of a complying superannuation fund, this exception is not applicable here since the owner of the Policy is the Trustee which is the trustee of a unit trust, not a complying superannuation fund. | Detailed Reasoning - Result is not dependent on the holding period of the Units by the Unit Holder: This outcome is also not dependent on the period of time for which the Unit Holder held their Units. Relevantly, there is no condition in subsection 118-300(1A) that requires a Unit Holder to hold their Units for a certain period in order for the exemption under that subsection to apply to the payment. | Detailed Reasoning - Question 8: Will a non-resident Unit Holder be subject to capital gains tax under Part 3-1 upon disposal of their Unit or receipt from the Trustee of a distribution on their Unit? | Summary: On the basis of the relevant assumptions, any capital gain on the disposal of Units by a non-resident Unit Holder or receipt from the Trustee of a distribution on their Unit will be disregarded under Division 855 since the Units are not TAP. | Detailed Reasoning - Division 855: Under section 855-10, any capital gain or capital loss from a CGT event is disregarded if you are a non-resident just before the CGT event happens and the CGT asset is not TAP. Under subsection 108-5(1), a 'CGT asset' is any kind of property or a legal or equitable right that is not property. The Units are CGT assets. There are 5 categories of CGT assets that are TAP as set out in the table in section 855-15. | Detailed Reasoning - Taxable Australian real property - category 1: Item 1 of the table in section 855-15 is TARP as defined in section 855-20. TARP is real property situated in Australia or a mining, quarrying or prospecting right if the minerals, petroleum or quarry materials are situated in Australia. Therefore, the Units in the Unit Trust are not TARP and are not TAP under category 1. | Detailed Reasoning - Indirect Australian real property interest - category 2: Item 2 of the table in section 855-15 deals with CGT assets that are an indirect Australian real property interest (IARPI) as defined in section 855-25. A membership interest held by an entity in another entity is an IARPI at a particular time if the interest passes the non-portfolio interest test (NPIT) and the PAT at that particular time. Each Unit in the Unit Trust is a membership interest in the Unit Trust and will be an IARPI and therefore TAP if it satisfies both the NPIT and PAT at a particular time. Under section 855-30, a unit holder's interest in a unit trust satisfies the PAT if the unit trust's underlying value is principally derived from Australian real property which is when the market values of the unit trust's assets that are TARP exceeds the sum of the market values of its assets that are not TARP. As it is assumed for the purposes of this ruling that just before the disposal of any Units by a non-resident Unit Holder, the Unit Trust will not own assets that are TARP of such an amount so as to cause the Units to satisfy the PAT, each Unit will not be an IARPI, regardless of whether the Units will satisfy the NPIT which does not need to be considered. Consequently, the Units will not be TAP under category 2. | Detailed Reasoning - A CGT asset used in carrying on a business through a permanent establishment - category 3: Item 3 of the table in section 855-15 covers CGT assets that are used by a non-resident at any time in carrying on a business through a permanent establishment in Australia. For the purposes of this ruling, an assumption is made that the circumstances specified in item 3 will not apply to any non-resident Unit Holder and therefore the Units will not be TAP under category 3. | Detailed Reasoning - An option or right to acquire a CGT asset - category 4: Item 4 of the table in section 855-15 deals with an option or right to acquire a CGT asset that is covered by categories 1 (TAP), 2 (IARPI) or 3 (a CGT asset used to carry on a business through a permanent establishment). The Units do not give the Unit Holder a right or option to acquire any CGT assets under category 1, 2 or 3. Therefore the Units will not be TAP under category 4. | Detailed Reasoning - A CGT asset that is covered by subsection 104-165(3) - category 5: Item 5 of the table in section 855-15 deals with CGT assets that are covered by subsection 104-165(3). CGT event I1 happens under subsection 104-160(1) when an individual or a company stops being an Australian resident. Usually when CGT event I1 happens, a taxpayer needs to work out if they have made a capital gain or capital loss for each CGT asset that they owned just before they stop being an Australian resident. Subsection 104-165(3) provides an option for individuals to choose to disregard the making of a capital gain or a capital loss from all CGT assets covered by CGT event I1. If this option is chosen, each of those CGT assets is taken to be TAP until the earlier of a CGT event happening in relation to the asset or the individual again becoming an Australian resident. For the purposes of this ruling it is assumed that the choice under subsection 104-165(3) will not be relevant to a non-resident Unit Holder or, if relevant, will not be exercised such that the Units will not be TAP under category 5. | Detailed Reasoning - Conclusion: On the basis of the relevant assumptions, the Units are not TAP under any category under section 855-15. Therefore, any capital gain or capital loss arising from the disposal of the Units by a non-resident Unit Holder will be disregarded under section 855-10. | Detailed Reasoning - CGT event E4: As discussed in Question 7 of this ruling,CGT event E4 does not happen when a Unit Holder receives a distribution from the Trustee that is in whole or in part attributed to the Cash Value received by the Trustee under the Policy. This is on the basis that the payment is disregarded as a non-assessable part pursuant to paragraph 104-71(1)(db). Therefore, it is not possible for a non-resident Unit Holder to make a capital gain under CGT event E4 when it receives a non-assessable payment from the Trustee attributable to the Cash Value. Any capital gain that might otherwise arise under CGT event E4 for a Unit Holder would be disregarded under section 855-10 on the basis that CGT event E4 would happen in relation to the Units which are not TAP. | Detailed Reasoning - Question 9: Will the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply in respect of either: • the acquisition of a Policy by the Trustee; or • the acquisition of Units by a Unit Holder? | Summary: Part IVA of the ITAA 1936 will not apply to a scheme that includes the acquisition of a Policy by the Trustee or the acquisition of Units by a Unit Holder, as described in this ruling. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner power to cancel a 'tax benefit' that has been obtained, or would be obtained, but for section 177F of the ITAA 1936, by a taxpayer in connection with a scheme to which Part IVA applies. Part IVA of the ITAA 1936 will apply to a scheme if a person enters into or carries out part of the scheme for the dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. It is accepted that the scheme is an ordinary commercial transaction which is not generally entered into by participants for the sole or dominant purpose to enable any taxpayer to obtain a tax benefit. Therefore, Part IVA will not apply to a scheme comprising, in whole or in part, the acquisition of Units by the Unit Holders and/or the acquisition of the Policy by the Trustee.