Private ruling: Life insurance policy lump sum payment
Published: August 2012
Ruling period: 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Question and answer | Is the lump sum payment you received from a surrendered life endowment policy assessable income? | No.

Relevant facts and circumstances: You received a lump sum payment from a surrendered life endowment policy in Country X. You transferred the lump sum to your Australian bank account.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 26AH. | Income Tax Assessment Act 1997 section 6-5. | Income Tax Assessment Act 1997 subsection 6-10(2). | Income Tax Assessment Act 1997 section 118-300.

Reasons for decision: Summary: The assessable income of an Australian resident includes ordinary income and statutory income from all sources. Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts. Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property, and income from carrying on a business. Other characteristics of income that have evolved from case law included receipts that: · are earned · are expected · are relied upon, and · have an element of periodicity, recurrence or regularity. The lump sum assured amount received on maturity of a life assurance policy does not have the characteristics of ordinary income is therefore not ordinary income. Bonuses received on a life assurance policy are not income according to ordinary concepts (paragraph 2 of Taxation Ruling IT 2504). Your assessable income includes your statutory income from all sources under Section 6-10(4) of ITAA 1997. Bonuses received on surrender or maturity of a life policy can be considered to be statutory income and would be assessable income under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936). Where it is more than 10 years from the commencement of the policy or if the amount of premium paid has not increases by more than 25% in the last 10 years then the bonuses received on maturity of a life policy are not considered to be statutory income as they do not fall within the operation of section 26AH of the ITAA 1936 and are not included in assessable income (paragraph 3 of IT 2504). The lump sum proceeds of the endowment policy are capital and not assessable as income. Furthermore, under section 118-300 of the ITAA 1997, a capital gain or loss made under a life insurance policy is disregarded and does not need to be included in a tax return.

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