Private ruling: Foreign life policy
Published: June 2012
Ruling period: 1 July 2008 to 30 June 2009 | 1 July 2009 to 30 June 2010
Date scheme commenced: 1 July 2007

Ruling: Q1: Are any earnings reinvested in the XYZ Investment Bond (XYZ IB) included in your assessable income as you received no distributions? | A1: No. | Q2: Are interest, dividends and profits from share trading shown in the XYZ IB investment account included your assessable income? | A2: No. | Q3: Are the fees and charges shown in the XYZ IB investment account allowable deductions? | A3: No. | Q4: If shares/currencies held in the XYZ IB are sold are they also subject to capital gains tax (CGT)? | A4: No | Q5: Can your foreign life policy (FLP) loss be offset against your Australian sourced Income? | A5: No.

Relevant facts and circumstances: You are an Australian resident taxpayer. You hold interests in the following FLP's: XYZ Monthly Saving Bond (XYZ SB) XYZ Investment Bond. (XYZ IB) Both FLP's used the cash surrender value method. You were not paid any distributions or bonuses by the insurance company. You did not pay any fees & charges relating to the insurance policies personally. The date of commencement of risk of the policies was in the 2007-08 year.

Relevant legislative provisions: Section 23AK of the Income Tax Assessment Act 1936 Section 26AH of the Income Tax Assessment Act 1936 Subsection 26AH(6) of the Income Tax Assessment Act 1936 Subsection 26AH(9) of the Income Tax Assessment Act 1936 Section 529 of the Income Tax Assessment Act 1936 Section 533 of the Income Tax Assessment Act 1936 Paragraph 603(1)(g) of the Income Tax Assessment Act 1936 Subsection 605(2) of the Income Tax Assessment Act 1936 Section 606 of the Income Tax Assessment Act 1936 Subsection 6-5(2) of the Income Tax Assessment Act 1997 Subsection 6-10(4) of the Income Tax Assessment Act 1997 Section 10-4 of the Income Tax Assessment Act 1997 Section 15-75 of the Income Tax Assessment Act 1997 Section 104-5 of the Income Tax Assessment Act 1997 , and Section 118-300 of the Income Tax Assessment Act 1997

Reasons for decision: Detailed Reasoning - Application of the FIF measures: Attributable income of a FIF under section 529 of the Income Tax Assessment Act 1936 (ITAA 1936) is listed as statutory income by section 10-4 of the ITAA 1997. The FIF measures can apply to a taxpayer's interest in a FLP. The intent of the FIF measures is to tax Australian resident taxpayers on an accruals basis on the growth in value of, among other things, life insurance policies, issued by foreign resident entities, which have an investment component. | Detailed Reasoning - Earnings reinvested in the XYZ Investment Bond (XYZ IB): Paragraph 4 of IT 2504, provides that In the case of a unit-linked life assurance policy, the policy holder is not entitled to a bonus but rather to the increase in unit value. As there is no bonus, paragraph 26(i) does not apply. However, subsection 26AH(9) deems the increase in unit value to be a bonus for the purposes of section 26AH of the ITAA 1936. In your case, the policy is a unit linked life assurance policy. In accordance with subsection 26AH(9) of the ITAA 1936 the increase in unit value is a bonus. Section 26AH of the ITAA 1936 provides for the taxation of reversionary bonuses paid under short term life insurance policies taken out after 27 August 1982. The effect of section 26AH of the ITAA 1936 is that the full reversionary bonus is assessable if it is received in the first eight years, two-thirds of the bonus if received in the ninth year and one-third of the bonus if received in the tenth year. Reversionary bonuses received more than ten years from the date of commencement of the policy do not fall within the operation of section 26AH of the ITAA 1936 and are not included in the assessable income (paragraph 3 of IT 2504). | Detailed Reasoning - Assesability of interest, dividends and profits from share trading shown in the XYZ IB investment account: Dividends received from shares, interest and capital gains from sale of currencies and reinvested amounts received by the insurance company would only be assessable to you if they are paid to you by way of bonus or distribution (section 15-75 of the ITAA 1997) or If paid to you on redemption as a reversionary bonus within the fist ten years of the policies section 26 AH of the ITAA 1936). If you receive a reversionary bonus in respect of a FLP, such amount is included in the your assessable income to the extent provided for in subsection 26AH(6) of the ITAA 1936, such amount would be treated as non-assessable non-exempt income to the extent that you have already been subject to tax under the FLP attribution rules (section 23AK of the ITAA 1936). | Detailed Reasoning - Fees and charges shown in the XYZ IB investment account: Fees and charges were debited to your investment account by the insurance company. As these amounts were not paid by you personally no deduction is allowable. | Detailed Reasoning - Capital gains tax and life assurance: A capital gain or capital loss may be made if a CGT event happens to a CGT asset. Your insurance policy is a CGT asset. An increase in value of an investment is not a CGT event. Therefore, there would be no CGT implications each year if the value of the insurance bond increases. However: the surrender of a life insurance policy; the maturity of a policy gives rise to CGT event C2 (section 104-5 of the ITAA 1997). However, section 118-300 of the ITAA 1997 provides that if a CGT event happens to a life insurance policy, any capital gain or loss made from it by the original beneficial owner of the policy is ignored for CGT purposes. In your case, you are the original beneficial owner of the insurance policies. Accordingly, any capital gain made on the insurance bonds is ignored in accordance with section 118-300 of the ITAA 1997. You are not required to include the capital gain or loss from sale of shares or currencies shown in the worksheet as the amounts have not been distributed to you. | Detailed Reasoning - FLP losses: Under section 540 of the ITAA 1936 if the amount calculated under the cash surrender value method is a positive figure, then the amount is your gross FIF income. However, if the amount is a negative figure, that amount is your FIF loss (section 541 of the ITAA 1936). A FIF loss may be used to offset your assessable income, but only to the extent that you have previously been subject to FIF tax from the income of that FIF (that is, to the extent that you have a FIF attribution surplus in relation to that FIF). Basically, if you incur a FIF loss in relation to a particular FIF in a notional accounting period, that loss is an allowable deduction from your assessable income from all sources but with one important limitation. The amount of the loss that can be claimed is limited to your attribution surplus in relation to that FIF. If you have a surplus in the attribution account for a particular FIF, it means that at some point in the past, income has been attributed to you as a result of your interest in that FIF. By allowing you to offset a FIF loss against any of your assessable income, the provision is effectively allowing a carry back of the loss to the extent that an amount of income has, at some time, been brought to tax in relation to that FIF. Any unused FIF loss from FLP must be carried forward and can only be used to offset future income of the same FIF. Therefore any FIF loss from FLP may be used to offset the assessable income, but only to the extent that you have previously been subject to FIF tax on the income of that FIF from FLP (section 533 of the ITAA 1936). In your case, in the 2007-08 year of income there was no attributable income for the XYZ IB or XYZ SB. Accordingly, there can be no deduction for losses in the 2008-09 year of income. | Detailed Reasoning - 1) Attribution accounts: A system of attribution accounts operates to ensure that you do not pay tax on payments you receive which have previously been assessed on an accruals basis under the FIF provisions. FIF attribution accounts operate on the basis of credits and debits. A credit is referred to as a FIF attribution credit and a debit is referred to as a FIF attribution debit. Your FLP's will have FIF attribution credits recorded in their attribution accounts if an amount of FLP income is included in your assessable income under the FIF measures (section 529 of the ITAA 1936). Tax does not necessarily have to be paid on the amount to obtain the credit. The amount of FIF attribution credit is equal to the amount included in your assessable income or the amount of the FIF attribution debit, which arises for the FIF attribution account entity making the distribution (subsection 605(2) of the ITAA 1936). An FIF attribution debit would occur when the insurance company makes a distribution or bonus payment to you (paragraph 603(10(g) & section 606 of the ITAA 1936) Debits trace the movements of profits included in your assessable income under the FIF measures and prevent that income, where it has been attributed to you, from being taxed again. | Detailed Reasoning - 2) Cash Surrender Value Worksheet: Cash Surrender Value Worksheets are completed for each separate FLP interest to calculate your FIF assessable amount or loss. The amount shown in Part 1 item B of the cash surrender worksheet represents the amount of distributions or bonuses you received from the insurance company for the notional accounting period for those FLP interests which haven't been disposed of during the notional accounting period. The amount shown in the Part 3 item L of the cash surrender worksheet represents the amount of distributions or bonuses you received from the insurance company in the income year immediately preceding the year in which the FLP income is assessed. If the amount shown in Part 3 item M of the cash surrender value worksheet is negative it could be offset against other assessable income as previously discussed. Or it could be carried forward and offset against future attributed amounts from that FLP investment. The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 [ITAA 1997]).

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.