Product Ruling PR 2010/18
Date of effect: 1 September 2010

What this ruling is about: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. 2. In this Product Ruling this scheme involves the execution of the Business Buy-Sell Agreement (BBSA) and the Insurance Trust Deed (ITD). 3. This Product Ruling does not address: 4. This Product Ruling does not consider whether the Beneficiary is absolutely entitled as against the Trustee to the legally enforceable rights under the Insurance Policy . It is, however, assumed that the entities that can rely on the Ruling section of this Product Ruling are absolutely entitled as against the Trustee to the legally enforceable rights under the Insurance Policy (see paragraph 22 of this Ruling). Class of entities 5. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, those entities that can rely on the Ruling section are referred to as the Beneficiary. 6. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities that begin to participate in the scheme specified in this Ruling by virtue of their execution of the BBSA, as Principal, and the ITD, as Beneficiary, on or after the date this Product Ruling is made and on or before 30 June 2013. 7. The class of entities who can rely on the Ruling section of this Product Ruling does not include: Superannuation Industry (Supervision) Act 1993 8. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. Qualifications 9. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 18 to 22 of this Ruling. 10. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 11. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 5. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, those entities that can rely on the Ruling section are referred to as the Beneficiary. 6. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities that begin to participate in the scheme specified in this Ruling by virtue of their execution of the BBSA, as Principal, and the ITD, as Beneficiary, on or after the date this Product Ruling is made and on or before 30 June 2013. 7. The class of entities who can rely on the Ruling section of this Product Ruling does not include: | Superannuation Industry (Supervision) Act 1993: 8. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 9. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 18 to 22 of this Ruling. 10. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 11. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 12. This Product Ruling applies prospectively from 1 September 2010, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 1 September 2010 until 30 June 2013. This Product Ruling provides advice to the specified class of entities for the income years up to 30 June 2013 being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application. 13. However the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme. | Changes in the law: 14. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect. 15. Entities who are considering participating in the scheme are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued. | Note to promoters and advisers: 16. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued. 17. Subject to paragraphs 3 and 4 of this Ruling and the assumptions in paragraph 22 of this Ruling: 18. The scheme that is the subject of this Ruling is identified and described in the following documents: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 19. The documents highlighted are those that a Beneficiary will enter into. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Beneficiary, or any associate of a Beneficiary, will be a party to, which are a part of the scheme. 20. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 21. Following is a summary of the scheme: | Assumptions: 22. This Ruling is made on the basis of the following assumptions: Commissioner of Taxation 1 September 2010 | Absolutely entitled beneficiary: 23. If a beneficiary is absolutely entitled to a CGT asset as against a trustee of a trust (disregarding any legal disability), the CGT provisions apply to an act done by the trustee in relation to the asset as if the beneficiary had done it (section 106-50). Effectively, the trust relationship is ignored and the beneficiary is taken to be the owner of the CGT asset and the relevant taxpayer if a CGT event happens to that asset. 24. Taxation Ruling TR 2004/D25 [1] explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee. That ruling provides that the core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in an entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. | Section 108-5 - CGT asset: 25. Under subsection 108-5(1) a CGT asset is any kind of property or a legal or equitable right that is not property. 26. The rights under the Insurance Policy of an absolutely entitled Beneficiary as against the Trustee are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1). | Section 104-25 - CGT event C2: 27. Where the Insurer makes a payment of the Proceeds in satisfaction of the Beneficiary's contractual rights under the Insurance Policy, the Beneficiary's ownership of those rights are discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b)). 28. In the event of the Beneficiary's death, the rights to which the deceased Beneficiary was absolutely entitled as against the Trustee under the Insurance Policy will pass to their estate. CGT event C2 will happen to them upon the ending of those rights. 29. The Beneficiary, or the Beneficiary's estate in the event of the Beneficiary's death, will make a capital gain from this CGT event if the capital proceeds from the ending of the ownership of their asset are more than the asset's cost base or, alternatively, a capital loss from this CGT event if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). 30. The Beneficiary's, or the Beneficiary's estate's in the event of the Beneficiary's death, capital proceeds will be equal to the amount of Proceeds the Trustee receives or is entitled to receive from the Insurer under the Insurance Policy (section 116-20). 31. At the time of the Trustee's acquisition of the Insurance Policy the Beneficiary acquires a CGT asset with a cost base or reduced cost base that includes, as its first element, the insurance premium (subsections 110-25(2) and 110-55(2)). | Section 118-300 - payment of death benefits under Insurance Policy: 32. Section 118-300 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual. The meaning to be given to the expression 'policy of insurance on the life of an individual' includes, but is not limited to, life insurance policies within the common law meaning of that term. It can apply to other life insurance policies as defined in subsection 995-1(1) but only to the extent that those policies provide for a sum of money to be paid if an event happens that results in the death of an individual (Taxation Determination TD 2007/4). [2] 33. Item 4 of the table in subsection 118-300(1) provides that a capital gain or capital loss you made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 34. A deceased Beneficiary's estate would be taken to have acquired the deceased Beneficiary's rights under the life insurance policy for no consideration. A deceased Beneficiary's estate will therefore be entitled under item 4 in the table in subsection 118-300(1) to disregard any capital gain or capital loss they make under section 104-25 from the receipt of a payment of a death benefit from the Insurer. | Section 118-37 - payment of non-death benefits under Insurance Policy: 35. Section 118-37 disregards a capital gain or capital loss relating to compensation or damages received by a taxpayer as a result of any wrong, illness or injury they or their relative suffered. 36. A receipt of an amount under an insurance policy for a non-death benefit such as trauma or total and permanent disablement constitutes a form of compensation or damages covered by paragraph 118-37(1)(b) where the amount is received for a wrong, injury or illness suffered personally by the recipient or the recipient's relative. 37. Any capital gain or capital loss the Beneficiary makes under section 104-25 upon payment of a non-death benefit by the Insurer under the Insurance Policy in respect of an injury or illness suffered by the life insured (being the Beneficiary) will be disregarded under paragraph 118-37(1)(b). | Payment of Proceeds to Entities: 38. Under the ITD, the Beneficiary directs the Trustee to pay part of the Proceeds to each Entity set out in Schedule 2 of the ITD. Section 103-10 provides that the CGT provisions (including sections 118-37 and 18-300) apply as if you had received money or other property if it has been applied for your benefit or as you direct. 39. Accordingly, the payment of the Proceeds by the Trustee to an Entity other than the Beneficiary will be treated as if it were a payment by the Trustee to the Beneficiary (or the Beneficiary's estate) for the purposes of sections 118-37 and 118-300. | Transfer of Insurance Policy to Beneficiary: 40. No CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary. Therefore, no capital gain or capital loss will arise on the transfer of the Insurance Policy by the Trustee to the Beneficiary in accordance with the terms of the ITD. | Part IVA - anti-avoidance: 41. Provided that the scheme ruled on is entered into and carried out as disclosed in this Ruling, it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply. 42. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: This Product Ruling has been given on the basis that the entity(s) who applied for the Product Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Product Ruling. 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. 2. In this Product Ruling this scheme involves the execution of the Business Buy-Sell Agreement (BBSA) and the Insurance Trust Deed (ITD). 3. This Product Ruling does not address: 4. This Product Ruling does not consider whether the Beneficiary is absolutely entitled as against the Trustee to the legally enforceable rights under the Insurance Policy . It is, however, assumed that the entities that can rely on the Ruling section of this Product Ruling are absolutely entitled as against the Trustee to the legally enforceable rights under the Insurance Policy (see paragraph 22 of this Ruling). | Class of entities: 5. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, those entities that can rely on the Ruling section are referred to as the Beneficiary. 6. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities that begin to participate in the scheme specified in this Ruling by virtue of their execution of the BBSA, as Principal, and the ITD, as Beneficiary, on or after the date this Product Ruling is made and on or before 30 June 2013. 7. The class of entities who can rely on the Ruling section of this Product Ruling does not include: | Superannuation Industry (Supervision) Act 1993: 8. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 9. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 18 to 22 of this Ruling. 10. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 11. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:


Appendix: Absolutely entitled beneficiary: 23. If a beneficiary is absolutely entitled to a CGT asset as against a trustee of a trust (disregarding any legal disability), the CGT provisions apply to an act done by the trustee in relation to the asset as if the beneficiary had done it (section 106-50). Effectively, the trust relationship is ignored and the beneficiary is taken to be the owner of the CGT asset and the relevant taxpayer if a CGT event happens to that asset. 24. Taxation Ruling TR 2004/D25 [1] explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee. That ruling provides that the core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in an entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. | Section 108-5 - CGT asset: 25. Under subsection 108-5(1) a CGT asset is any kind of property or a legal or equitable right that is not property. 26. The rights under the Insurance Policy of an absolutely entitled Beneficiary as against the Trustee are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1). | Section 104-25 - CGT event C2: 27. Where the Insurer makes a payment of the Proceeds in satisfaction of the Beneficiary's contractual rights under the Insurance Policy, the Beneficiary's ownership of those rights are discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b)). 28. In the event of the Beneficiary's death, the rights to which the deceased Beneficiary was absolutely entitled as against the Trustee under the Insurance Policy will pass to their estate. CGT event C2 will happen to them upon the ending of those rights. 29. The Beneficiary, or the Beneficiary's estate in the event of the Beneficiary's death, will make a capital gain from this CGT event if the capital proceeds from the ending of the ownership of their asset are more than the asset's cost base or, alternatively, a capital loss from this CGT event if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). 30. The Beneficiary's, or the Beneficiary's estate's in the event of the Beneficiary's death, capital proceeds will be equal to the amount of Proceeds the Trustee receives or is entitled to receive from the Insurer under the Insurance Policy (section 116-20). 31. At the time of the Trustee's acquisition of the Insurance Policy the Beneficiary acquires a CGT asset with a cost base or reduced cost base that includes, as its first element, the insurance premium (subsections 110-25(2) and 110-55(2)). | Section 118-300 - payment of death benefits under Insurance Policy: 32. Section 118-300 exempts certain capital gains and losses made in respect of a policy of insurance on the life of an individual. The meaning to be given to the expression 'policy of insurance on the life of an individual' includes, but is not limited to, life insurance policies within the common law meaning of that term. It can apply to other life insurance policies as defined in subsection 995-1(1) but only to the extent that those policies provide for a sum of money to be paid if an event happens that results in the death of an individual (Taxation Determination TD 2007/4). [2] 33. Item 4 of the table in subsection 118-300(1) provides that a capital gain or capital loss you made from a CGT event happening in relation to a CGT asset that is an interest in rights under a life insurance policy is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 34. A deceased Beneficiary's estate would be taken to have acquired the deceased Beneficiary's rights under the life insurance policy for no consideration. A deceased Beneficiary's estate will therefore be entitled under item 4 in the table in subsection 118-300(1) to disregard any capital gain or capital loss they make under section 104-25 from the receipt of a payment of a death benefit from the Insurer. | Section 118-37 - payment of non-death benefits under Insurance Policy: 35. Section 118-37 disregards a capital gain or capital loss relating to compensation or damages received by a taxpayer as a result of any wrong, illness or injury they or their relative suffered. 36. A receipt of an amount under an insurance policy for a non-death benefit such as trauma or total and permanent disablement constitutes a form of compensation or damages covered by paragraph 118-37(1)(b) where the amount is received for a wrong, injury or illness suffered personally by the recipient or the recipient's relative. 37. Any capital gain or capital loss the Beneficiary makes under section 104-25 upon payment of a non-death benefit by the Insurer under the Insurance Policy in respect of an injury or illness suffered by the life insured (being the Beneficiary) will be disregarded under paragraph 118-37(1)(b). | Payment of Proceeds to Entities: 38. Under the ITD, the Beneficiary directs the Trustee to pay part of the Proceeds to each Entity set out in Schedule 2 of the ITD. Section 103-10 provides that the CGT provisions (including sections 118-37 and 18-300) apply as if you had received money or other property if it has been applied for your benefit or as you direct. 39. Accordingly, the payment of the Proceeds by the Trustee to an Entity other than the Beneficiary will be treated as if it were a payment by the Trustee to the Beneficiary (or the Beneficiary's estate) for the purposes of sections 118-37 and 118-300. | Transfer of Insurance Policy to Beneficiary: 40. No CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary. Therefore, no capital gain or capital loss will arise on the transfer of the Insurance Policy by the Trustee to the Beneficiary in accordance with the terms of the ITD. | Part IVA - anti-avoidance: 41. Provided that the scheme ruled on is entered into and carried out as disclosed in this Ruling, it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. | This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling. | Appendix 2 - Detailed contents list


Related rulings: TR 2004/D25 TD 2007/4
Legislative references: ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 103-10 ITAA 1997 104-25 ITAA 1997 104-25(1)(b) ITAA 1997 104-25(3) ITAA 1997 106-50 ITAA 1997 108-5 ITAA 1997 108-5(1) ITAA 1997 110-25(2) ITAA 1997 110-55(2) ITAA 1997 116-20 ITAA 1997 118-37 ITAA 1997 118-37(1)(b) ITAA 1997 118-300 ITAA 1997 118-300(1) ITAA 1997 995-1(1) SISA 1993 TAA 1953 Copyright Act 1968
Subject references: capital gains tax financial products insurance policies product rulings public rulings tax avoidance taxation administration