Private ruling: Life Insurance Proceeds
Date of advice: 20 December 2016
Published: May 2017
Ruling period: 1 July 20XX to 30 June 20YY
Date scheme commenced: During the income year commencing 1 July 20XX

Ruling: Q1: Will the payment of the life insurance proceeds (the Proceeds) to the Deceased Estate under the Deed be a dividend as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and for the purpose of subsection 44(1) of the ITAA 1936? | A1: No | Q2: Alternatively, would the payment of the Proceeds by the Company be regarded as a 'payment' under Section 109C of Division 7A of the ITAA 1936 by the Company and therefore be subject to income tax in the hands of the executor and trustee of the Estate as a deemed dividend? | A2: No

Relevant facts and circumstances: A Life Insurance Policy was held by the Company over the life of Person Y. The Company is the legal entity recognised by the insurer as the owner of the Life Insurance policy (the Policy) and is the entity to which it the Insurer has paid the proceeds of the Policy (the Proceeds). There was considerable doubt as to beneficial ownership of this policy and who was entitled to the proceeds as there is evidence to suggest that there was a clear intention to transfer ownership of the Policy from the Company to Person Y during their lifetime. Further, payment of premiums was assumed personally by Person Y during their lifetime (by way of a loan account offset with Person Y for all premiums for seven years immediately prior to Person Y's death). The policy issuer recognised only the legal owner of the Policy and paid the Proceeds of the Policy to the Company to a solicitors trust account. The taxpayers have since received a jointly instructed independent legal opinion on the ownership of the Policy (the Opinion). The Opinion concluded that while the legal owner of the policy was the Company, the beneficial ownership of the Policy had passed to the Estate. Person X is the executor and also the sole beneficiary of the Estate. Probate in the Estate was granted to Person X. Subsequent to the Opinion, the Company and Person X entered into a Deed that: ● recited that the Company is the legal owner of the policy; ● recited that as a result of the jointly obtained opinion of Counsel the parties had agreed to enter into the Deed; and ● required the Company to claim upon and account to Person X as executor of the estate of Person Y for the whole of the proceeds of the Life Insurance policy. A subsequent Relevant Court judgment determined that the Estate is the beneficial owner of the Proceeds. The basis of the Judgment was the enforceability of the Deed. The Judgment also determined that this requirement was based on the Opinion.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1936 section 109C

Reasons for decision: Summary: The payment of the Proceeds under the Deed to the Estate will not be a dividend s defined in subsection 6(1) of the ITAA 1936 and pursuant to section 44(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by a company out of profits derived by it from any source. Subsection 6(1) of the ITAA 1936 defines 'dividend' to include: a) any distribution made by a company to any of its shareholders, whether in money or other property; and b) any amount credited by a company to any of its shareholders as shareholders; c) (Repealed by No 63 of 1998) but does not include d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation or a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or e) moneys paid or credited, or properly distributed by a company for the redemption or cancellation of a redeemable preference share if: i) the company gives the holder of the share a notice when it redeems or cancels the share; and ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and iii) the amount is debited to the company's share account.except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; and f) a reversionary bonus on a life assurance policy. In the current circumstances, the Judgment has determined that the beneficial owner of the Proceeds is the Estate. The Proceeds are held in the Account pending the execution of the Judgment. When the Proceeds are paid to the Estate there will be no change in beneficial ownership but merely a transfer from the solicitor's trust account to the Estate. As the Proceeds are not beneficially owned by the Company, their payment to the Estate from the trust account is not a 'distribution' or 'amount credited' by the Company to the Estate for the purpose of subsection 6(1) of the ITAA 1936 and is therefore not included in the Estate's assessable income pursuant to subsection 44(1) of the ITAA 1936. | Summary: The payment of the Proceeds by the Company to the Estate will not be regarded as a 'payment' under section 109C of Division 7A of the ITAA 1936 and therefore be deemed to be a dividend. | Detailed Reasoning - Detailed reasoning: Subsection 109C(1) of the ITAA 1936 provides relevantly: A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either: (a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or (b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time. In the current circumstances, the Judgment has determined that the beneficial owner of the Proceeds is the Estate. The Proceeds are held in the trust account pending the execution of the Judgment. When the Proceeds are paid to the Estate there will be no change in beneficial ownership but merely a transfer from the solicitor's trust account to the Estate. As the Proceeds are not beneficially owned by the Company, their payment to the Estate from the trust account is not an amount paid by the Company to the Estate and therefore cannot be taken to be the payment of a dividend for the purpose of subsection 109C(1) of the ITAA 1936.