Private ruling: Foreign life plan
Published: October 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Questions and answers | 1. Will the lump sum you receive on the termination of your whole of life plan be assessable as ordinary income under the Income Tax Assessment Act 1997 ? | No. | 2. Will the lump sum you receive on the termination of your whole of life plan be assessable under the capital gains tax provisions of the Income Tax Assessment Act 1997 ? | No. | 3. Will that part of the lump sum you receive on the termination of your whole of life plan that is in excess of the premium payments made, be assessable under section 26H of the Income Tax Assessment Act 1936? | Yes.

Relevant facts and circumstances: You have been living in country X with your spouse for the last two years. You intended to stay in country X for at least five years; however, your circumstances have changed and you may return to Australia sooner than expected. You and your spouse took out a five year regular premium unit linked whole of life plan with a foreign financial services company which has a registered head office in country Y. The plan comes with life cover of 101% of the investment value of the plan and the lives of both you and your spouse are insured under the plan. The plan is funded by monthly premium payments for a period of five years unless you choose to surrender earlier. The premium payments are used to purchase units in various investment funds within the plan. The value of the plan depends on the value of the various investment funds in which the units are invested. There is no guaranteed return on the funds invested. You will not receive any income or dividends for the duration of the plan and will only receive a lump sum on the surrender or expiry of the plan.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 26AH | Income Tax Assessment Act 1936 subsection 26AH(6) | Income Tax Assessment Act 1936 subsection 26AH(9 | Income Tax Assessment Act 1936 section 160AAB Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 118-300

Reasons for decision: Summary: Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year. | Detailed Reasoning - Ordinary income: Ordinary income has generally been held to include three 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 include receipts that are earned, are expected, are relied upon and have an element of periodicity, recurrence or regularity. In your case, you and your spouse have taken out a joint regular premium unit linked whole of life plan which is an investment plan that also provides death cover. Any contract that provides for a payment of money on the death of a person is considered to be a life policy for Australian income tax purposes. You will receive a 50% share of a lump sum payout from the plan on expiry or surrender. As the plan is linked to the investment performance of the units the funds are invested in, you will receive proceeds over and above the total of the monthly premiums contributed to the plan should the plan perform satisfactorily. The lump sum payment you eventually receive will not be income from rendering personal services, income from property or income from carrying on a business. Further, the payment will be a one off payment and as such will not have an element of periodicity, recurrence or regularity. Therefore, the lump sum payment will not be assessable as ordinary income. | Detailed Reasoning - Capital gains tax provisions: Receipt of a lump sum payment may give rise to a capital gain (statutory income). However, under section 118-300 of the ITAA 1997, a capital gain made under a life insurance policy is disregarded and is not included in assessable income. A capital loss is also disregarded. Therefore, regardless of whether you make a gain or a loss on the lump sum you receive on termination of the plan, it will be disregarded for capital gains tax purposes and will not need to be recorded on your income tax return. | Detailed Reasoning - Assessability of bonuses received from life policies: Taxation Ruling IT 2504 Income tax: deductibility of interest on borrowed funds - life assurance policies (IT 2504) provides the Commissioner's views on 'bonuses' received from life insurance policies and states at paragraph 2 that bonuses received on a life insurance policy are not assessable as ordinary income. However, section 26AH of the ITAA 1936 includes in assessable income certain bonuses received under short term life insurance policies taken out after 27 August 1982. Subsection 26AH(6) of the ITAA 1936 provides that where, during the period of 10 years from the date of commencement of risk of a life policy, a taxpayer receives an amount under the policy as, or by way of, bonus which would not otherwise be included in the assessable income of the taxpayer, the assessable income of the taxpayer shall include the full bonus 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. However, in the case of a unit-linked life insurance policy, IT 2504 states that the policy holder is not entitled to a bonus but rather to any increase in unit value. With this type of policy, subsection 26AH(9) of the ITAA 1936 deems the increase in unit value to be a bonus for the purposes of section 26AH. Therefore, under section 26AH of the ITAA 1936, your 50% share of the amount you receive from the lump sum payment that is in excess of the total premiums made to the plan will be included in your assessable income in the income tax year you receive the payment. Although a tax offset is available on the amount of a bonus a taxpayer includes in their assessable income under section 26H of the ITAA 1936, this is not available in respect of bonuses received from foreign life insurance companies as they do not pay income tax in Australia (paragraph 160AAB(1)(a) of the ITAA 1936).