Private ruling: Foreign life policy
Date of advice: 7 September 2016
Published: October 2016
Ruling period: Year ended 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Question and answer | Are you required to pay tax on a lump sum from a foreign life policy in Australia? | No.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You have an overseas life policy. This policy is about to expire and you will receive a lump sum payment. You have held the policy for more than 10 years.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1936 section 26AH

Reasons for decision: Summary: Division 6 of the Income Tax Assessment Act 1997 (ITAA 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 provides the Commissioner's views on bonuses received from life insurance policies. It states at paragraph 2: Bonuses received on a policy of life assurance are not income according to ordinary concepts and therefore do not constitute assessable income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936). In your case, the lump sum payment will not be ordinary income; it will only be included in your assessable income if it is statutory income. Section 26AH of the ITAA 1936 includes in assessable income certain bonuses received under short term life insurance policies. You will receive lump sum payment from the life policy when it matures. Section 26AH of the ITAA 1936 provides for the taxation of certain reversionary bonuses received under a relevant life assurance policy (an eligible policy) during a specified period (the eligible period). Taxation Ruling IT 2346 - income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation discusses the application of section 26AH of the ITAA 1936 to short-term life assurance policies. Bonuses received under life insurance policies are not assessable under section 26AH of the ITAA 1936 if the policy has been held for a minimum of 4 or 10 years, depending on whether the date of commencement of risk is before or after 27 August 1982. In your case, you will receive a lump sum payment when the life policy matures. You have held the policy for more than 10 years. Therefore, the lump sum payment you receive is not assessable under section 26AH of the ITAA 1936. You are therefore not required to include the lump sum payment in your Australian income tax return.