Private ruling: Foreign life policy
Date of advice: 23 October 2015
Published: October 2015
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 2015

Ruling: Question and Answer | Is the amount received on maturity of a foreign life policy (FLP) included in your assessable income? | No

Relevant facts and circumstances: You immigrated to Australia. From that time you became a resident of Australia for taxation purposes. Preceding immigration to Australia you purchased 2 life insurance policies: Policy#1 will mature during the financial year ended 30 June 20XX Policy#2 will mature during the financial year ended 30 June 20XX The policies are insuring your life only. You purchased these life insurance policies when you were a non-resident of Australia for taxation purposes. Your foreign tax agent has indicated that the policies were fully tax and that no further tax was payable on payout. The currency of the policy is not AUD. Throughout the life of the policy you paid fixed monthly premiums, these amounts never increased and will not increase for the life of the policy.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 108-5. | Income Tax Assessment Act 1997 Section 118-300. | Income Tax Assessment Act 1936 Section 26AH.

Reasons for decision: Detailed Reasoning - Assessability of amounts that accrue in foreign life policy: Section 6-5 of the ITAA 1997 states that assessable income consists of both ordinary income and statutory income. However, an amount of ordinary or statutory income will not be assessable income if the amount is made exempt or is otherwise excluded from assessable income. In working out whether you have derived an amount of ordinary income, and if so when you derived it, section 6-5 of the ITAA 1997 states that you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. In your case, you invested in foreign life policies. The amounts that accrue in your foreign life policies result in changes in the value of the policy. As the amounts that accrued are not received by you or dealt with on your behalf, you have not actually received these amounts as income. Therefore, the amounts that accrue annually in your foreign life policy are not assessable as ordinary income in Australia. | Detailed Reasoning - Becoming an Australian resident: When you become an Australian resident (other than a temporary resident), you are taken to have acquired certain assets at the time you became a resident for their market value at that time. This does not apply to assets you acquired before 20 September 1985 (pre-CGT assets) and assets that were taxable Australian property. | Detailed Reasoning - CGT exemption for policies acquired after 20 September 1985: Section 118-300 of the ITAA 1997 excludes from the application of CGT provisions certain capital gains or capital losses relating to the taxpayer's interests under insurance policies, in specified circumstances. A capital gain or loss from a relevant CGT event (cancellation, surrender and similar endings) happening in relation to a taxpayer's interest in rights under a life insurance policy or an annuity instrument is disregarded if either: • the taxpayer is the original beneficial owner of the policy or instrument • if not, the taxpayer acquired for no consideration the interest in the policy • the taxpayer is the trustee of a complying superannuation | Detailed Reasoning - Assessability of reversionary bonuses: The proceeds received from the maturity of your foreign life policy are classed as a reversionary bonus. A reversionary bonus paid under a short term life policy on maturity, forfeiture or surrendered taken out after 28 August 1982 is subject to special tax treatment if the risk commenced after 7 December 1983 under section 26AH of the ITAA 1936. Subsection 26AH(2) of the ITAA 1936 states that if a reversionary bonus is received after 10 years from commencement of a life insurance policy, that the bonus received is not assessable. Subsection 26AH(13) of the ITAA 1936 states that the 10 year period is reset if the premiums in one year exceed the premiums in the previous year by more than 25%. You are in possession of one policy which was taken out before 28 August 1982 and another policy that was taken out after that 28 August 1982. You have paid the same amount of premiums into both policies and have not increased the premiums. The older policy is not covered by the capital gains tax legislation and the newer policy has any gain excluded from assessability as you are the original beneficial owner of the policy. The amounts that you will receive from these two policies are not included in your assessable income.