Private ruling: Foreign income from investment and life assurance bonds
Date of advice: 9 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017. | Year ending 30 June 2018. | Year ending 30 June 2019.
Date scheme commenced: 1 July 2016.

Ruling: Q1: Will regular withdrawal payments drawn from your life assurance bond (the bond) be subject to income tax in Australia? | A1: No | Q2: Will the lump sum payment received from the surrender of your bond be subject to income tax in Australia? | A2: No

Relevant facts and circumstances: You are an Australian resident, having relocated to Australia a number of years ago. You purchased units in a life assurance bond (the bond) in 20XX for an amount. Units were held by you across a number of investments funds including money, fixed interest, property and shares. The investment bond incorporates life assurance. A condition of the bond is that you can take up to 5% of income from the bond as a regular withdrawal of capital, with no income tax or capital gain tax payable in the foreign country. The conditions also state that if you do not use the full 5% entitlement in any year, the unused amount can be carried forward for use in future years. You regularly withdraw a specified amount from your bond balance half yearly.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1936 Section 26AH

Reasons for decision: Summary: Withdrawal payments drawn from the bond are considered a bonus and because you have held the bond for more than 10 years, no part of the bonus is included in your assessable income. Similarly, as income received from your bond on termination of your policy is a reversionary bonus of capital and interest, you are not liable to tax on the income, as the bond has been held by you for more than 10 years. | Detailed Reasoning - Detailed reasoning: 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. Therefore, the worldwide income of a person residing in Australia is subject to tax in Australia. 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 . Bonuses are defined in Taxation Ruling IT 2346 Income Tax: Bonuses paid on certain life assurance policies -Section 26AH-Interpratation and operation, as profit derived from the sale of investment units when paid to the policyholder. Similarly, interest derived in respect of an investment account policy, is when paid to the policy holder regarded as a bonus. In your case, periodic payments of interest or the sale of investment units from your bond are considered a bonus and form part of your assessable income. However, as you have held the bond which incorporates a life assurance policy for more than 10 years, no part of the bonus is included in your assessable income. A reversionary bonus is a bonus containing a capital and investment component and is paid only on termination of the policy ((12 CTBR (NS) 189 Case 34; Case Q74 (1965) 15 TBRD 346). While an estimate of the value of the accrued reversionary bonus may be made each year, it does not accrue to the credit of the policy owner at that time. Therefore, the policyholder does not become entitled to the bonus or receive it until the policy is terminated. Reversionary bonuses paid on the termination of life insurance policies are included in the assessable income, by section 26AH of the ITAA 1936. However, where the life insurance policy in question commences after 7 December 1983, amounts received by way of bonuses are assessable in full in the first 8 years after the policy commences and in years 9 and 10 of the policy, two thirds and one third respectively of the bonus is assessable. For a policy held for more than 10 years, no part of the reversionary bonus is included as assessable income. In your case, you are not liable to tax on the income, as you have held your bond for more than 10 years. | Detailed Reasoning - Conclusion: In your case, where you have held the bond for more than 10 years, the bonuses received will not be subject to income tax.