Private ruling: Treatment of insurance proceeds
Published: September 2014
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: 1) Was there a beneficial ownership change of the Policy from Company A to the Estate for no consideration that would qualify for the CGT exemption under section 118-300 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer: No 2) Will the receipt of Policy proceeds by Company A benefit from the CGT exemption under section 118-300 of the ITAA 1997? Answer: Yes 3) Would the payment by Company A to the Estate of the amount representing the proceeds it receives from the Policy be an ordinary dividend under section 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? Answer: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-300 | Income Tax Assessment Act 1936 section 44(1) | Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1936 subsection 160ZZI(3 )

Reasons for decision: Summary: Was there a beneficial ownership change of the policy of Company A to the Estate for no consideration that would qualify for the CGT exemption under section 118-300 of the ITAA 1997? For a person to be the legal but not beneficial owner of an asset (in this case the Policy), a trust must exist. A trust exists whenever legal ownership of property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary. There are three types of trusts, namely, express (or declared), resulting (or implied) and constructive. | Detailed Reasoning - Express (or declared) trust: An express (or declared) trust is intentionally created by a person. The person has explicitly expressed their intention to create a trust either orally or in writing. The fact that a trust was intended may be deduced from the conduct of the relevant parties. | Detailed Reasoning - Resulting (or implied) trust: A resulting (or implied) trust arises by operation of law. The intention to create a trust has not been expressed. However, the law presumes that a trust was intended from the circumstances of the case. | Detailed Reasoning - Constructive trust: A constructive trust is imposed by operation of law, regardless of the intentions of the persons concerned, when the law considers it unfair for the person who has legal ownership of the property in question to retain beneficial ownership of it. The existence of a constructive trust is dependent upon an order being made by a court. It is considered that Company A is the beneficial as well as legal owner of the policy. | Detailed Reasoning - Revenue or capital - keyman insurance: The term keyman insurance denotes insurance on the life of a director, partner, employee or other key person associated with the taxpayer in business. The types of policies involved are whole of life, endowment, term life assurance, sickness and accident insurance. The Policy, as a life cover policy over the life of Person A as managing director of Company A, would be considered a keyman insurance policy. Taxation Ruling IT 155 looks at the Commissioner's treatment of the two categories of keyman insurance policies which exist. The view of the Commissioner is that • premiums on keyman life or endowment policies will not be deductible under section 8-1 of the ITAA 1997 and the proceeds will not be assessable under 6-5 of the ITAA 1997. This view is partly due to the fact that the proceeds of the keyman life or endowment policy will usually be used for a capital purpose. The view adopted in Board of Review decisions is that the payment of the premium builds up an asset in the form of a policy, which consequently should be considered to be an investment. There may be circumstances where it can be shown that the payment under the policy will be applied for revenue purposes, but there still will be the difficulty that the policy will be viewed as an asset and the premium payment a capital investment • premiums on keyman accident or term policies where the purpose of the insurance was to fill the place of a revenue receipt which the event insured against prevented from arising or of outgoing which has been incurred on revenue account in consequence of the event insured against will be deductible under section 8-1 of the ITAA 1997 and the proceeds will be assessable under 6-5 of the ITAA 1997. IT 155 provide the following example of a situation in which policy proceeds would not represent income: ..insurance taken out by a company in respect of a director for the purpose of providing, in the event of death by accident, funds for the payment to his estate of a debt owing to the director IT 155 states in paragraphs 10-11: With regard to the type of evidence which would be required to establish the purpose for which an accident or term insurance policy has been effected and kept in force, information about the taxpayer's minutes or book entries would be of some value but should not necessarily be regarded as conclusive. All the surrounding circumstances may properly be taken into account in seeking to determine the purpose for which a policy was effected. The purpose for which the proceeds are used is relevant not because this governs the issue directly but because it provides some indication of what the purpose of taking out the policy is likely to have been. It could not be conceded that any particular method of declaring the taxpayer's intentions in advance would be conclusive for income tax purposes. Apart from anything else, the taxpayer might change his plans from time to time and renew the same policy from year to year for varying purposes. For example, a company that has received an insurance payment as a consequence of the death of a director may contend that the insurance was taken out in respect of a director for the purpose of providing, in the event of death by accident, funds for the payment to his estate of a debt owing to the director, though no debt was owing to the director when the proceeds were received. This type of situation would call for enquiries to ascertain whether the debt was in existence at the time of the latest renewal. If the debt had been cleared beforehand, evidence such as minutes indicating that the insurance was originally taken out for the purpose stated by the company could be discounted as being irrelevant in the changed circumstances. The policy is considered to be on the capital account. Section 118-300 of the ITAA 1997 Section 118-300 of the ITAA 1997 excludes from the application of the CGT provisions certain capital gains or capital losses relating to the taxpayers interests under insurance policies, in specified circumstances. The CGT exemption applies to capital gains or losses from a CGT event relating to rights under life insurance policies or annuity instruments, if the taxpayer is the original beneficial owner of the policy. The issue of who is the original beneficial owner of a policy has been addressed in Taxation Determination TD 94/31 Income tax: capital gains: what is meant by the term 'original beneficial owner' as used in subsection 160ZZI(3) of the Income Tax Assessment Act 1936? In this case Company A is the legal owner and as determined above, also the beneficial owner. Company A is entitled to the policy proceeds and retains management and control over the Policy as well as the power to transfer or otherwise dispose of the proceeds. As Company A is considered the original beneficial owner, any capital gain or loss resulting on the surrender of the Policy will be disregarded in accordance with section 118-300 of the ITAA 1997. Would the payment by Company A to the Estate of the amount representing the proceeds it receives from the Policy be an ordinary dividend under section 44(1) of the ITAA 1936? Section 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder in a company includes dividends, as defined in subsection 6(1) of the ITAA 1936, that are paid to the shareholder out of profits derived by the company from any source. The definition of 'dividend' in subsection 6(1) of the ITAA 1936 has the effect that any distribution made by the company to any of its shareholders, whether in money or property, is a dividend except where the distribution is debited against an amount standing to the credit of the share capital account of the company (paragraphs (a) and (d) of the definition. If Company A transfers the insurance proceeds to the Estate the payment will be considered a dividend for the purposes of subsection 6(1) of the ITAA 1936 as it is considered a distribution, not out of the share capital account, to a shareholder.

Relevant facts: Company A carries on a business. | The day to day management of the business was conducted by Person A. | Person A was a director of the company and was responsible for the day to day running of the company. | Capital keyman life insurance was taken out on Person A by the company. The company was the named beneficiary of the policy. | Interactions between the company and Person A indicated that Person A may have wanted to transfer the policy to themselves in their own name however this was not officially carried out. | Person A's shares in Company A are currently owned by their Estate. | The insurer recognises Company A as the beneficiary of the policy. | Company A is considering transferring the proceeds of the policy to the Estate of Person A.