Private ruling: Foreign income - foreign life policy
Published: September 2011
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you a temporary resident of Australia? | A1:  | Q2: Is the distribution from a fund in Country x assessable in Australia? | A2: 

Relevant facts and circumstances: You are a citizen of country A. You arrived in Australia in the income year 2010-11. The purpose of your visit was look for work. You started on a casual basis and became full time after few months. You want to stay permanently in Australia. You have left Australia for short periods only since first arriving for a funeral, to visit family and for holidays. You are renting a room. The only asset you have in Australia is a bank account. You were renting with your spouse before you came to Australia. The only asset held by you in your country of origin is a joint account with your spouse. You have no other income from country A. You have some foreign shares in a overseas insurance fund in country X . The date of commencement of risk of your insurance policy was 19XX. There has been no change in the value of the premiums. You and your spouse have no interests in: · Foreign non employer sponsored super funds · Investment linked life assurance policies · Foreign trusts The clients of the insurance policy provider, were contacted to advise them of the intention to propose an arrangement to terminate their policies. The motivation for the Scheme was for the benefit of policyholders, as bonus rates were expected to reduce further over time, resulting in lower payout values to policyholders. A formal procedure for implementing was in place. The Scheme of Arrangement is a legal process whereby policyholders can as a body agree (or not) to have their policies terminated provided there is a substantial majority vote (both by number of policyholders and value) in favour of the Scheme, it becomes binding on the whole class of' policyholders who so voted. Submissions with full disclosure were made to both policyholders and the Court. Policyholders voted in favour of the Scheme and this was ratified by the Supreme Court in the country where the policy was held. In 2009-10 income year the rights of the policyholders under their policies were terminated and the actuarial reserve value was paid to the respective policyholders. The amount payable is your Ascertained Scheme claim less any outstanding loan or premium debts plus any premiums due and paid on the policy. The amount was paid as a lump sum

Relevant legislative provisions: Subsection 6(1) of the Income Tax Assessment Act 1936. | Subsection 6-5(2) of the Income Tax Assessment Act 1997 | Subsections 6-10(4) of the Income Tax Assessment Act 1997 | Section 768-910 of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources during the income year. However if an Australian resident is also a temporary resident their foreign sourced income may not need to be included in their assessable income. The term resident of Australia is defined in subsection 6(1) of the Income Tax Assessment Act 1936 . It provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. Only one of these tests needs to be satisfied. The residency test most relevant to your circumstances is the resides test which uses the ordinary meaning of the word reside: The ordinary meaning of the word 'reside', according to the Macquarie Dictionary , online , is ' to dwell permanently or for a considerable time; have one's abode for a time ' ', and according to the Compact Edition of the Oxford English Dictionary (1987), is 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'. You are considered to be an Australian resident under this test from the date of your arrival in Australia because: · you intend to live in Australia permanently · your spouse is arriving shortly and will look for work · you intended to obtain full time employment and have done so · you have obtained a room in which you are now living · you have left Australia for short periods only since first arriving. Under subsection 995-1(1) of the ITAA 1997, an Australian resident is a temporary resident if: · they hold a temporary visa granted under the Migration Act 1958, and · they are not an Australian resident within the meaning of the Social Security Act 1991, and · their spouse is not an Australian resident within the meaning of the Social Security Act 1991. The temporary residence provisions have no affect as far as Australian sourced income is concerned. You will still be required to include Australian sourced income in your assessable income in accordance with subsection 6-5(2) and subsection 6-10(4) of the ITAA 1997. An Australian resident under the Social Security Act 1991 is a person who resides in Australia and is either an Australian citizen or holds a permanent resident visa. You are a temporary resident because: · As a Country A citizen you are not required to have a visa to enter Australia · you are not an Australian resident within the meaning of the Social Security Act 1991 as you are not an Australian citizen or hold a permanent residency visa, and · your spouse is not an Australian resident within the meaning of the Social Security Act 1991 as they is not an Australian citizen or hold a permanent residency visa . Section 768-910 of the ITAA 1997 provides that ordinary income and statutory income is non assessable non exempt income when derived by a temporary resident of Australia. Also the lump sum proceeds of a life insurance or endowment policy are capital and not assessable as statutory or ordinary income from a foreign source.

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