Private ruling: Whole of life insurance and endowment assurance
Date of advice: 16 November 2017
Published: April 2018
Ruling period: 1 July 2017 to 30 June 2018
Date scheme commenced: 197X

Ruling: Q1: Does the activation of the conversion feature of a 'whole life' insurance policy to an ‘endowment assurance’ policy, where the commencement of risk was before DDMMYY, activate the 10 year rule under section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936), making the payments and bonuses assessable income? | A1: No. | Q2: Are you entitled to maintain the tax free status of a policy which was legally transferred to you for nil consideration when the commencement of risk on the policy was before DDMMYY? | A2: Yes.

Relevant facts and circumstances: You have requested and extension to a previous ruling. The facts have not changed. You have whole life insurance policies with special conditions for conversion to endowment assurance policies. The policies were started in years A, B and C; prior to DDMMYY. The policies were started as life insurance policies and as a means of retirement savings. The first policy was initially recorded a parent’s name as the grantee (the beneficiary of the policy) and the subsequent policies recorded yourself as the grantee. In each policy you are nominated as the life assured. Following the death of your other parent in year D legal transfer occurred of the year A whole life insurance policy to you. You exercised the option to convert the two policies paid for by yourself in years E and F and there was no mention from your insurance advisor about a possible future tax liability arising from the conversion of the whole of life policies to endowment assurance policies. When you enquired about exercising your option to convert the remaining policy to an endowment assurance policy you were advised of a potential income tax liability arising from ‘any payment you receive’ unless the policy is kept for a further 10 years after the date of conversion. The policies were designed and intended to be retirement savings accounts. During the term of all the policies the premiums have remained constant therefore not breaching the 25% yearly increase rule to reset the ‘10 year tax free rule’. The payment to be received from the whole of life or the endowment assurance policy is in the nature of a lump sum. Assumptions It is assumed that the insurance policy which commenced in year A and which was acquired by you in 200X was acquired for nil consideration.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 26AH | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 15-75 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 104-5 | Income Tax Assessment Act 1997 Section 118-300 | Income Tax Assessment Amendment Act 1984

Reasons for decision: Summary: The policies you hold are not considered to be ‘eligible policies’ with regard to the bonuses you may receive on the policies regardless of whether the policy has been converted from a whole of life policy to an endowment assurance policy as permitted by the special provisions of the policy undertaken. No income arising from the policy, whether it is a capital receipt or a bonus will be considered assessable income, | Detailed Reasoning - Detailed reasoning: The lump sum proceeds of a life assurance or endowment assurance policy are capital and not assessable as income even though they may be received in more than one instalment of the fixed capital sum. Similarly, an amount received on the surrender of such a policy is capital. Section 26AH was inserted in the ITAA 1936 by the Income Tax Assessment Amendment Act 1984 (Act No. 14 of 1984), which received the Royal Assent on 12 April 1984. The section provides for the taxing of amounts paid as or by way of bonuses under life assurance policies taken out after DDMMYY and which are not subject to tax under any other provision of the income tax law. Section 26AH of the ITAA 1936 provides that a taxpayer's assessable income shall include bonuses, and some other amounts in the nature of bonuses, received under a relevant life assurance policy (an eligible policy) during a specified period (the eligible period). An eligible policy is defined to mean a policy of life assurance in relation to which the date of ‘commencement of risk’ is after DDMMYY, while the date of commencement of risk in relation to an eligible policy is – ● the date of commencement of the period to which the first or only premium paid under the policy relates; or ● where the first or only premium does not relate to a particular period, the date of payment of that premium. The eligible period in respect of an eligible policy is the first 10 years in the case of a policy with a date of commencement of risk after DDMMXX or the first 4 years where the date of commencement of risk is after DDMMYY and on or before DDMMXX. For eligible policies, the Commissioner’s view on the assessability of bonuses and other payments where a policy is converted to a different policy table such as a whole of life to an endowment assurance policy is covered in Taxation Ruling IT 2346. Paragraph 14 of that ruling indicates that if an eligible policy is converted to a different table a new eligible policy is created. In your case, the date of commencement of risk for your life insurance policy was before DDMMYY, and as such it is not considered an eligible policy. As a result, section 26AH of the ITAA 1936 does not apply to your circumstances. Subsection 118-300(1) Item 3 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or loss made from a capital gains tax (CGT) event (such as the surrender of a policy) is disregarded under a policy of insurance on the life of an individual and you are the original beneficial owner of the policy. Taxation Determination TD 2007/4 discusses the nature of policies which are considered to be included by the term ‘policy of insurance on the life of an individual’ and the lump sum proceeds received from an endowment life policy are included as detailed in Example 4 which states: ● Jesse was the original beneficial owner of an endowment life insurance policy. Jesse received a lump sum payment under the policy when he attained 60 years of age. ● On receipt of the payment under the policy, CGT event C2 in section 104-25 happened. Any capital gain or loss that Jesse makes as a result of CGT event C2 happening is disregarded under section 118-300 because the payment was made on the happening of an event that was contingent on the duration of human life. Because the dates for the ‘commencement of risk’ for the whole of life policies was prior to DDMMYY the conversion of the policies to endowment assurance policies by exercising an option available in the original policies does not create new eligible policies for the purposes of section 26AH of the ITAA 1936. | Summary: You are entitled to maintain the tax free status of a policy which was legally transferred to you for nil consideration. | Detailed Reasoning - Detailed reasoning: Subsection 118-300(1) Item 4 of the ITAA 1997 states that a capital gain or loss made from a CGT event (such as the surrender of a policy) is disregarded under a policy of insurance on the life of an individual and you are an entity that acquired the interest in the policy or instrument for no consideration. Example 2 of Item 4 above states: Peter is the original beneficial owner of the rights under a policy of insurance on the life of an individual. He transfers the rights to his spouse for nothing. There are no CGT consequences for him and none for his spouse if he dies. Subsequent to the disregarding of the transfer of beneficial rights for CGT purposes it then follows that the date for the commencement of risk is maintained (in this case the year is year A) and any bonuses received on the life assurance or endowment assurance policy are not assessable income.