Private ruling: Life assurance policies
Date of advice: 16 July 2019
Published: September 2019
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023 | Year ending 30 June 2024 | Year ending 30 June 2025 | Year ending 30 June 2026 | Year ending 30 June 2027 | Year ending 30 June 2028 | Year ending 30 June 2029
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the asset, being a bond, assigned from your parent's estate a life insurance policy? | A1: Yes | Q2: Did the assignment of the bond from the parent's estate give rise to assessable income? | A2: No | Q3: Did the redemption of the bond assigned from your parent's estate give rise to some assessable income? | A3: Yes | Q4: Are the assets, being bonds, invested in the name of the trusts established by your relatives and assigned to you after your parent's death life insurance policies? | A4: Yes | Q5: Did the assignment of the bonds from the non-resident trusts give rise to assessable income attributable to you as a beneficiary of a foreign trust? | A5: No | Q6: Did the assignment of the bonds from the non-resident trusts, which occurred for nil consideration, give rise to assessable income to you as an Australian resident? | A6: No | Q7: If you encash the bonds received from non-resident trusts, will any amount be included in your assessable income? | A7: No

Relevant facts and circumstances: You left Country X in 1990's. You have no long term intention to return to Country X. You have not lived in Country X or been a Country X tax resident since leaving You are an Australian resident for taxation purposes. Apart from a five year period where you lived in Country Y, you have retained Australian tax residency since leaving Country X. One of your parents passed away a number of years ago. Later your other parent died and their assets were divided equally between you and the deceased's other child (a Country X resident not an Australian resident) following this. You received one bond through this parent's estate. This bond has since been encashed by you. Your parent's were at no times tax residents of Australia. Your parents had set up a number of 'life assurance bonds' which they owned directly or via trust arrangements. These 'life assurance bonds' were not placed with any entities related to Australia. The trustees of the trusts holding the bonds did change over time as the parents passed away. No trustee of the trusts were residents of Australia. The assets held in non-resident trusts were not allocated to you and your sibling via your parent's estate; instead a half share of each of the trust's assets were assigned in specie to each of the two children as beneficiaries from the trusts directly with the trusts ceasing to exist after the assignment. No consideration was paid by you for your share of these assets. The assignments occurred in the XXXX income year. The non-resident trusts were originally established by capital contributions by your parents who are now both deceased. These were all established more than 10 years ago. No additional capital contributions were made into the non-resident trusts. All of the bonds had a life assured.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 26AH | Income Tax Assessment Act 1936 subsection 26AH(6) | Income Tax Assessment Act 1936 subparagraph 26AH(6)(c) | Income Tax Assessment Act 1936 subsection 26AH(8) | Income Tax Assessment Act 1997 section 118-300 | Income Tax Assessment Act 1997 section 775-15 | Income Tax Assessment Act 1997 subsection 775-15(1) | Income Tax Assessment Act 1997 subsection 775-15(2)

Reasons for decision: Summary: You will have an amount of assessable income included under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) for the bond inherited from your parent's estate upon encashment. The gains from the encashment of the policies assigned from the other trusts will not be included in your assessable income. | Detailed Reasoning - Whether the bonds are 'life assurance policies': Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines what income is included in the assessable income of a person who is required to pay tax in Australia. For a resident of Australia, that provision states that all income, whether derived from within Australia or outside is included in their assessable income. Generally, the Australian laws on taxation of life assurance bonuses apply equally to Australian and overseas policies. This is so because the definition of a life assurance policy is the same as the definition of 'life policy' used in the Life Insurance Act 1995 . The definition of life policy is found in section 9 of the Life Insurance Act 1995 . It is set out below: (1) Subject to subsection (2), each of the following constitutes a life policy for the purposes of this Act: (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; (b) a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life; (c) a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life; (d) a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the term prescribed by the regulations for the purposes of this paragraph; (e) a continuous disability policy; (f) a contract (whether or not it is a contract of insurance) that constitutes an investment account contract; (g) a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract. (2) A contract that provides for the payment of money on the death of a person is not a life policy if: (a) by the terms of the contract, the duration of the contract is to be not more than one year; and (b) payment is only to be made in the event of: (i) death by accident; or (ii) death resulting from a specified sickness. As can be seen from the definition, it canvasses a wide range of scenarios. Analysing each of the bonds in question, they all have a life insured and besides that, would constitute an investment linked contract due to their structure. Therefore each of the policies will be considered a life assurance policy. | Detailed Reasoning - Whether Policy 1 assignment gave rise to assessable income?: You received this asset through a deceased estate and paid no consideration. Accordingly there would be no taxation consequences at this point. | Detailed Reasoning - Section 26AH: Division 6 of theITAA 1997 sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included: · income according to ordinary concepts; that is, ordinary income (section 6-5 of the ITAA 1997), or · an amount which is included by a specific provision about assessable income; that is, statutory income (section 6-10 of the ITAA 1997). Taxation Ruling IT 2504 - income tax: deductibility of interest on borrowed funds - life assurance policies states that bonuses received on a policy of life assurance are not income according to ordinary concepts and therefore do not constitute assessable income. In your case, the bonuses will not be ordinary income and they will only be included in your assessable income if they are statutory income. Section 15-75 of the ITAA 1997 provides that assessable income includes any amount you receive as or by way of bonus on a life insurance policy, other than a reversionary bonus. A reversionary bonus is a bonus paid on maturity, forfeiture or surrender of a policy. Section 26AH of the ITAA 1936 includes in assessable income certain reversionary bonuses received under short term life insurance policies. | Detailed Reasoning - Policy 1: You received a bonus on encashing this policy. You receive this bonus in the 10 th year of the eligible period. Usually this means an amount of one-third of the relevant gain will be included in the assessable income. However this does not apply if a taxpayer received the amount in consequence of the death of the person on whose life the policy was effected (subparagraph 26AH(7)(a)(i) ITAA 1936). You state that the policy can only be encashed on the death of your parent, therefore this may come within this subparagraph. The phrase 'in consequence of' is not defined in the Income Tax Acts. However case law has determined its meaning in other contexts. It has been taken to mean 'follows as an effect or result of' ( Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45). The amount you received was not received in consequences of the death of your parent. The policy had many lives insured including yourself. The policy did not end upon your parents death. The amount you received was made from a personal choice to encash the policy. This could have been done quickly after the assignment of the bond. It however could also have been many years after assignment. Therefore this subparagraph would not apply. The Commissioner has a discretion in subsection 26AH(8) ITAA 1936 to not include the bonuses in a taxpayer's assessable income under subsection 26AH(6) ITAA 1936. In doing this the Commissioner has regard to: i) the total amount of premiums paid under the eligible policy; ii) the total amounts received by the taxpayer or by any other person under the eligible policy and the total amounts of bonuses included in the amounts so received: iii) the amount of the surrender value of the eligible policy at the time when the forfeiture, surrender or other termination occurred; and iv) such other matters as the Commissioner considers relevant Taxation Ruling IT 2346 - income tax: Bonuses paid on certain life assurance policies - section 26AH - interpretation and operation states that the object of this discretion is to ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the holder or holders of the policy exceeds the premiums paid under the policy. From analysis of the factual situation, the Commissioner will not exercise his discretion in the circumstances. Therefore an amount under section 26AH(6) ITAA 1936 will be included in your assessable income. | Detailed Reasoning - Assessability of gain on assignment: Certain CGT events can occur when a trust distributes an amount of cash or property to a beneficiary. In this case the foreign trust disposed of its whole of life assurance policy in segments to the beneficiaries. A capital gain or loss from a relevant CGT event happening in relation to a taxpayer's interest in rights under a policy of insurance on the life of an individual or an annuity instrument is disregarded if: · the taxpayer is the original owner of the policy or instrument (other than the trustee of a complying superannuation fund); · the taxpayer acquired the interest in the policy or instrument for no consideration; or · the taxpayer is the trustee of a complying superannuation entity for the income year in which the CGT event happened. Section 118-300 of the ITAA 1997 excludes from the application of CGT provisions certain capital gains or capital losses relating to a taxpayer's interests under insurance policies, in specified circumstances. A capital gain or loss from a relevant CGT event happening in relation to a taxpayer's interest in rights under a policy of insurance on the life of an individual or an annuity instrument is disregarded if: · the taxpayer is the original owner of the policy or instrument (other than the trustee of a complying superannuation fund); · the taxpayer acquired the interest in the policy or instrument for no consideration; or · the taxpayer is the trustee of a complying superannuation entity for the income year in which the CGT event happened. You acquired the policy as a distribution from a foreign trust for no consideration. Therefore any capital gain or loss that resulted from the CGT event is disregarded under item 4 of subsection 118-300(1) of the ITAA 1997. | Detailed Reasoning - Section 26AH: As mentioned above, these are all life assurance policies. Therefore 26AH ITAA 1936 is relevant to each of the situations. All these bonds will be encashed after 10 years. Section 26AH ITAA 1936 does not tax any amounts received 10 years after the policy commenced. All the bonds will be encashed after 10 years. Therefore no amounts received from encashing these bonds will subject to tax. | Detailed Reasoning - Forex provisions: In regard to the forex implications of this, you received a CGT asset when the bond was assigned to you on your mother's death. There would be no CGT consequences upon the disposal of the bond as item 4 in the table in section 118-300 ITAA 1997 would operate to disregard any capital gain as the CGT event would happen to a policy of insurance on the life of the individual and you received your interest for no consideration. Section 775-15(1) ITAA 1997 states assessable income includes a forex realisation gain you make as a result of a forex realisation event that happens during the year. However it is not included in your assessable income to the extent that it is a gain of private or domestic nature or is an item not covered by the table in section 775-15(2). That table in effects lists a condition that must be satisfied before a forex realisation event will be lead to assessable income. The condition is as follows: 'a gain that would result from the occurrence of a realisation event in relation to the foreign currency, or to the right, or the part of the right, would, apart from this Division, be taken into account under Part 3-1 or 3-3'. As discussed above, the gain would be disregarded under the CGT provisions contained in Part 3-1 and 3-3 of the ITAA 1997. The condition in the table mentioned above would not be satisfied as the gain would not be taken into account in the CGT provisions. Accordingly, there will be no gains assessed under the forex provisions.