Private ruling: International: Income - life insurance policies and managed funds
Published: August 2016
Ruling period: 1 July 2012 to 30 June 2013

Ruling: Questions and answers | 1. Is the lump sum payment you received from a surrendered foreign life insurance policy assessable income? | No. | 2. Are you entitled to claim a foreign income tax offset for the tax paid on the funds received from your foreign life insurance policy? | No. | 3. Is the gain on the disposal of the units in the foreign managed fund assessable in Australia? | Yes. | 4. If the gain on the disposal of the units in the foreign managed fund is assessable in Australia can you claim a 50% discount? | Yes. | 5. If the gain on the disposal of the units in the foreign managed fund is assessable in Australia, can you claim a foreign income tax offset? | Yes. | 6. Can you use carry forward losses from prior years in Country Z tax returns against the income from Country Z in the Australian tax return? | Withdrawn.

Relevant facts and circumstances: You opened two life insurance policies in Country Z, of which you are the beneficial owner. You arrived in Australia on a XX visa. You became a permanent resident of Australia. You have dual citizenship of both Country Z and Australia. You opened a managed fund with an initial investment in Country Z. You did not make further contributions to the managed fund. You closed the managed fund and received a payment in Country Z. You paid tax on the payment received from the managed fund in Country Z. You closed the two life insurance policies; from Policy 1, you received the amount of XX and paid tax of XX. When you closed Policy 2, you received the amount of XX and paid tax of XX. The funds from the two life insurance policies and managed fund were deposited into your own personal bank account in Country Z and are available to you at any time. You do not know the value of the funds, at the time you became a resident of Australia for taxation purposes. You have paid tax in Country Z for all monies receive from the life insurance policies and the managed fund. None of the funds have been transferred to Australia.

Relevant legislative provisions: International Tax Agreements Act 1953 | Income Tax Assessment Act 1936 Section 26AH | Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1936 Section 136-40 | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 subsection 6-15(1) | Income Tax Assessment Act 1997 Section 15-75 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 103-20 | Income Tax Assessment Act 1997 Section 109-55 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 118-300 | Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Section 770-10 | Income Tax Assessment Act 1997 Section 770-70 | Income Tax Assessment Act 1997 Section 770-75 | Under section 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) the assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia. Under subsection 6-5(1) of the ITAA 1997 ordinary income is income according to ordinary concepts. | Section 6-10 of the ITAA 1997 states statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law. | Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income. | Life insurance policy payment | The lump sum proceeds of a life insurance policy are capital and are not assessable as ordinary income. | Taxation Ruling IT 2504 discusses life assurance policies, and states that bonuses received on a policy of life insurance are not income according to ordinary concepts and therefore are not assessable income under section 6-5 of the ITAA 1997. | Section 15-75 of the ITAA 1997 provides that a taxpayer's assessable income includes any amount received as a bonus, other than a reversionary bonus, on a life insurance policy. | A reversionary bonus is one paid on maturity, forfeiture or surrender of a life insurance policy. A reversionary bonus accumulates within the policy and is to be contrasted with a bonus which is payable annually. | Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in assessable income certain reversionary bonuses received in respect of life insurance policies where the date of commencement is after 27 August 1982. | Section 102-20 of the ITAA 1997 provides that a taxpayer makes a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset. | A life assurance policy is a CGT asset for the purposes of the CGT provisions. Under section 118-300 of the ITAA 1997 any capital gain or loss is disregard if the taxpayer is the original beneficial owner of the policy. | Under section 770-10 of the ITAA 1997, to qualify for an income tax offset, you must have paid foreign income tax on an amount that is included in your Australian assessable income for that year. | Application to your circumstances | You received a payment or bonus on the surrender of your life insurance policy. Your bonuses were reversionary bonuses, and therefore section 15-75 of the ITAA 1997 does not apply. | Your policy commenced after 27 August 1982, therefore section 26AH of the ITAA 1936 applies. However, as your bonus was received more than 10 years from the date of commencement of risk, it is not assessable. | You are the original beneficial owner of the policies and are entitled to disregard (and not include in your assessable income) any assessable gain or loss made from the termination of the policies | The proceeds you received on maturity of your life insurance policies are not assessable income as they are neither ordinary nor statutory income. | You therefore do not have to pay tax on the proceeds and they do not need to be included in your income tax return for the relevant financial year. | Consequently, a tax offset is not available to you for the tax you have paid in relation to the life insurance policies. | Managed fund | In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Agreements Act 1953 (Agreements Act). Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). | Schedule xx to the Agreements Act contains the tax treaty between Australia and Country Z (Country Z Agreement). The Country Z Agreement operates to avoid the double taxation of income received by Australian and Country Z residents. | An Article of the Country Z Agreement deals with 'Other income' and provides that; | 1 Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. | 2 The provisions of paragraph x shall not apply to income, other than income from real property as defined in paragraph 2 of Article x, derived by a resident of a Contracting State where that income is effectively connected with a permanent establishment or fixed base situated in the other Contracting State. In that case the provisions of Article x or Article x, as the case may be, shall apply. | 3 Notwithstanding the provisions of paragraphs x and x, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of the Agreement from sources in the other Contracting State may also be taxed in the other Contracting State. | An Article of the Country Z Agreement provides that subject to the laws of Australia, the Country Z tax paid by an Australian resident in respect of income derived from Country Z shall be allowed as a foreign tax offset against the Australian tax payable on that income. | Application to your circumstances | In accordance with tax treaty between Australia and Country Z any income you derive from Country Z can be taxed in Australia. | Capital gains tax (CGT) discount for foreign resident individuals | The CGT discount, previously known as the CGT 50% discount, was available to foreign resident individuals on taxable Australian property. | In the 2012-13 Budget, the government announced changes to the application of the CGT discount. These changes became law on 29 June 2013. | From 8 May 2012, foreign or temporary resident individuals must meet certain eligibility conditions to apply the CGT discount. | For CGT events occurring after 8 May 2012, the application of a CGT discount percentage will depend on: | • whether the CGT asset was held before or after 8 May 2012 | • the residency status of the individual who has the capital gain. | Under section 115-10 of the ITAA 1997, to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. | The capital gain must result from a CGT event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event. | To avoid double taxation, foreign income received by an Australian resident may be eligible for a foreign income tax offset for the foreign tax paid on the interest. The amount of the credit is limited to the Australian tax payable on the income received. | Application to your circumstances | You opened a managed fund and you then closed the fund on xx xx xx. In xx xx you became a permanent resident of Australia. | You have held the investment for more than 12 months and therefore will be eligible for the 50% discount on any capital gain. | Foreign Tax Offset | If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation. | Under section 770-10 of the ITAA 1997, to qualify for an offset, you must have paid foreign income tax on an amount that is included in your Australian assessable income for that year. | The offset is based on the total foreign income tax paid, however, it is limited to the amount of Australian income tax that would have been payable on the relevant income (sections 770-70 and 770-75 of the ITAA 1997). | If you are claiming a foreign income tax offset of more than $1,000, you will first need to work out your foreign income tax offset limit. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreign-taxed and foreign-sourced income and related deductions were disregarded. | Application to your circumstances | You paid income tax, in Country Z, on the funds you received from your managed fund, accordingly, under an Article of the Country Z Agreement you may claim a tax offset. | For more information, refer to the Guide to foreign income tax offset rules xx-xx available at www.ato.gov.au. Any excess offset cannot be carried forward to a later income year.