Product Ruling PR 2024/11
Date of effect: 1 July 2024

What this ruling is about: 1. This Ruling sets out the income tax consequences for entities referred to in paragraph 4 of this Ruling in connection with an Executive Investment Bond (EIB) issued by Utmost International Isle of Man Limited (Utmost [1] ) and subject to the Executive Investment Bond Policy Terms (Policy Terms). 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1936, unless otherwise indicated. Terms which are defined in the Policy Terms (ref EIB4) referred to in paragraph 11 of this Ruling have been capitalised. 3. This Ruling does not address: Who this Ruling applies to 4. This Ruling applies to you if you are [2] : 5. This Ruling does not apply to you if you are not an entity listed in paragraph 4 of this Ruling. Requirements of the Superannuation Industry (Supervision) Act 1993 6. This Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993. 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 Ruling as to whether investment in this scheme may contravene the provisions of the Superannuation Industry (Supervision) Act 1993. 7. This Ruling applies from 1 July 2024 to entities specified in paragraph 4 of this Ruling. 8. However, the Ruling only applies and may be relied on to the extent that there is no change in the scheme or in the entity's involvement in the scheme. If the scheme carried out is materially different from the scheme described at paragraphs 11 to 33 of this Ruling, this Ruling cannot be relied upon and may be withdrawn or modified. 9. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 10 of this Ruling: Assumptions 10. This Ruling is made on the basis of the following necessary assumptions: 11. The scheme is identified and described in the following: Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under freedom of information legislation. 12. For the purposes of describing the scheme, there are no other agreements (whether formal or informal, and whether or not legally enforceable) which an entity referred to in paragraph 4 of this Ruling, or any associate of such entity, will be a party to which are a part of the scheme. Overview of scheme 13. Utmost, registered in the Isle of Man, issues (among other products) EIBs. Entities (Policyholders) capable of purchasing an EIB from Utmost are not residents of Australia for tax purposes at the time of issue. 14. At the Policyholder's discretion, an EIB is issued in the form of a single Policy or a number of separate Policies (known as a Cluster of Policies) each representing an equal proportion of the EIB. Where the EIB is set up as more than one Policy, the Policy Terms apply equally to each Policy. 15. Full details of the EIB, including the commitments and rights of both Utmost and a Policyholder, are contained in the Policy Terms. The Policy Terms are interpreted in accordance with, and are governed by, the law of the Isle of Man. Portfolio Funds and Units 16. To enable calculation of the benefits and charges under an EIB, Utmost creates notional units (referred to as Allocated Units or Units), each representing a proportionate share of the value of the Assets in a Portfolio Fund linked to the Policyholder's EIB. The Assets in the Portfolio Fund linked to the Policyholder are chosen by the Policyholder (or their Fund Adviser or Intermediary) from a broad selection of asset classes, subject to Utmost's acceptance, and may be changed by instruction from the Policyholder (or their Fund Adviser or Intermediary). 17. Allocated Units are allocated whenever a Premium is paid by the Policyholder and credited by Utmost to the Policyholder's Transaction Account, an account Utmost keeps to buy and sell Assets for the Portfolio Fund linked to the Policyholder, as well as for the payment of benefits. The percentage of the Policyholder's Premium used to calculate the number of Units allocated to their EIB each time they pay a Premium is referred to as the Allocation Percentage. 18. The value of the Portfolio Fund (and the price of the Allocated Units) is determined on the Contract Date and on each quarterly Valuation Date (Quarterly Date) thereafter. 19. While the Policyholder legally owns their EIB, they have no legal or beneficial interest in the Units, Portfolio Fund or any of the Assets therein, which remain the property of Utmost. Any appointed Custodian under the terms of the EIB is therefore custodian of Utmost, not the Policyholder. Fixed Account loan withdrawals 20. The Policyholder may at any time request that an amount less than the Surrender Value (as explained in paragraph 23 of this Ruling) be transferred from the Portfolio Fund (by surrender of Allocated Units for their Surrender Value) to Units in a Fixed Account. A Fixed Account is a separate and identifiable account maintained by Utmost for the purpose of granting interest-free loans. 21. The Policyholder may borrow up to the amount of the value of their Units in the Fixed Account (if any) interest-free. Repayment of such a loan may be made by the Policyholder while their EIB remains in force. On repayment, the: 22. As the Fixed Account does not earn interest or participate in capital growth, Units allocated in it maintain the same value at all times. Surrender of a Policy 23. The Policyholder can surrender one or more of their Policies and receive the Surrender Value, being the value of the Allocated Units allocated to the Policy (or Policies), less any outstanding charges. 24. Where the Policyholder totally surrenders one or more of their Policies: 25. Where the Policy ends by total surrender, the amount of any yet-to-be repaid loan procured by a Policyholder and funded by a transfer of funds to a Fixed Account (as per paragraph 20 of this Ruling) will be offset against the Surrender Value payable to the Policyholder. 26. Any part surrender of a Policyholder's Cluster of Policies may, on request by the Policyholder, be made regularly (each month, 2 months, quarter, 4 months, 6 months, or year, subject to minimum withdrawal limits and minimum Portfolio Fund value at the time) and must be made by selling Assets in each of those Policies. 27. The Policyholder can provide Utmost with instructions as to which Assets to realise to pay a part surrender benefit. If Utmost pays the Policyholder a part surrender benefit, then it will cancel Allocated Units to pay the benefit based on the price of those Units on the preceding Quarterly Date (or the Contract Date if there is none). 28. Any Surrender Value or part surrender benefit paid to the Policyholder on total or part surrender respectively consists of the Premium allocated to the cancelled Allocated Units, as adjusted for any earnings referrable to the Assets represented by those Allocated Units. 29. The Policyholder has no right to payment of the Surrender Value or part surrender benefit, as applicable, other than on surrender of their EIB either in whole or in part. Death benefit 30. The EIB is a whole-of-life assurance policy providing for a payment of a Death Benefit on the death of the Relevant Life Assured. Where multiple lives are assured under an EIB, the Relevant Life Assured is the last of the lives assured to die. A life assured under an EIB may or may not be that of the Policyholder. 31. The Death Benefit payable by Utmost is 101% of the Surrender Value, calculated on the Final Valuation Date that the last of the Assets have been realised and credited to the Transaction Account. 32. On payment of the Death Benefit the Allocated Units (subject to all Assets being sold or disposed of) will be cancelled, and (subject to paragraph 33 of this Ruling) no further benefit will be payable by Utmost under the EIB. 33. If there are any Units standing to the credit of the EIB in a Fixed Account then their value will also become payable on the death of the Relevant Life Assured. This part of the Death Benefit will be 100% of the value of the Units in the Fixed Account. Commissioner of Taxation 3 July 2024 Application of section 26AH to the Executive Investment Bond 34. All, or part of, amounts received as, or by way of, bonuses under certain life assurance policies (eligible policies) which otherwise would not be included in the assessable income of the recipient, are included in the assessable income of the recipient pursuant to subsection 26AH(6) when received within 10 years of the date on which the first or only premium paid under the policy was paid (eligible period). The Executive Investment Bond is an eligible policy 35. An eligible policy in respect of which section 26AH may apply is defined in subsection 26AH(1) to mean: 36. The term 'life assurance policy' is defined in subsection 6(1) as having the meaning given to life insurance policy by the ITAA 1997. A life insurance policy is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given to the expression 'life policy' in section 9 of the Life Insurance Act 1995 (LIA 1995). 37. A contract of insurance that provides for the payment of money on the death of a person and a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract, both constitute a life policy under paragraphs 9(1)(a) and (g) of the LIA 1995. 38. Some of the more general features of an investment-linked policy are described in paragraphs 5 and 6 of Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies  section 26AH  interpretation and operation as follows: 39. An EIB issued to a Policyholder referred to in paragraph 4 of this Ruling is an eligible policy for the purposes of section 26AH as it: Treatment of benefits received under the Executive Investment Bond 40. The term 'bonus' is not defined for the purposes of section 26AH but is explained at paragraph 8 of IT 2346 in the context of 'more traditional policies' (for example, endowment policies) as a guaranteed addition to the amount insured, payable when the amount insured is payable and representing both a form of participation by the policyholder in the issuing company's profits and a share in the surpluses derived by the issuing company during the period the policy is in force. Such a bonus, where received under an eligible policy that matures or is surrendered, forfeited or otherwise terminated within the eligible period of 10 years after commencement, falls within the scope of section 26AH. 41. The EIB, being an investment-linked policy, may be characterised as an unbundled life assurance contract (also referred to as an 'unbundled policy' in IT 2346). In the context of unbundled policies, paragraph 9 of IT 2346 explains: 42. The portion of a Surrender Value or any part surrender benefit comprising an adjustment for earnings referrable to the Assets represented by the cancelled Allocated Units and paid by Utmost from the balance of the Transaction Account maintained for each Policyholder that owns an EIB, is considered to be a bonus. This amount provides the Policyholder with participation in the profits of Utmost, as derived from the Assets in the Portfolio Fund linked to the Policyholder (but owned by Utmost) during the period the Policyholder's EIB is in force. 43. Payments of a bonus by Utmost from the balance of the Transaction Account maintained under an EIB are therefore subject to section 26AH and are not assessable under any other provision of the ITAA 1936 or the ITAA 1997. Specifically, a bonus received under an EIB is included as assessable income of a Policyholder pursuant to subsection 26AH(6) to the following extent: 44. To ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the policyholder under an eligible policy (that is, amounts previously received (including any amounts of bonus) and the surrender value at the time of forfeiture, surrender or other termination) exceeds the premiums paid under that eligible policy, subsection 26AH(8) provides, subject to any other matters the Commissioner considers relevant, a discretion for the Commissioner to exclude from assessable income the whole, or part of, an amount received as, or by way of, a bonus by reason of the forfeiture, surrender or other termination of an eligible policy, and which would otherwise be included in assessable income by the application of subsection 26AH(6) (see paragraph 10 of IT 2346). 45. Where a policyholder receives an amount under an eligible policy within the eligible period otherwise than as, or by way of, a bonus, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (see subsection 26AH(9)). No portion of a Surrender Value or part surrender benefit received by a Policyholder under an EIB otherwise than as or by way of a bonus (as referred to in subparagraph 9(b) of this Ruling) shall be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as if it had been received as or by way of a bonus. 46. Subject to subsection 26AH(5), subsection 26AH(4) operates to ensure that where an amount payable under an eligible policy is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder, they are taken to have received that amount under or in relation to that policy. Subsection 26AH(6) does not, however, apply to bonuses that are merely notionally credited during the life of the policy but cannot actually be received until it ends. In this regard, subsection 26AH(5) provides that subsection 26AH(4) does not apply to an amount in relation to an eligible policy that is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder so as to increase the surrender or maturity value that might reasonably be expected to be received under the policy. 47. An accretion in the value of the Portfolio Fund linked to a Policyholder, as calculated on a Valuation Date, constitutes a bonus that is merely accrued so as to increase the amount ultimately payable to the Policyholder on part or total surrender of their EIB, and pursuant to subsection 26AH(5) is not regarded as having been received by the Policyholder for the purposes of assessment under subsection 26AH(6). 48. A facility which allows policyholders of investment-linked policies to reclassify or vary the class or classes of assets supporting the policy is known as 'switching'. The rights or entitlements of the policyholder under the policy remain unchanged following exercise of the switching option, except that the future value of the policy will be calculated by reference to different assets, and subsection 26AH(4) does not apply in the manner explained in paragraph 46 of this Ruling (see Taxation Determination TD 94/82 Income tax: does section 26AH of the Income Tax Assessment Act 1936 apply when investment options are 'switched' under an eligible policy?) Switches of the Assets in the Portfolio Fund linked to the Policyholder involves the mere variation in the calculation base of their EIB such that subsection 26AH(4) does not apply, for the purposes of assessment under subsection 26AH(6), to take the Policyholder to have received an amount under or in relation to their EIB. 49. Where a policyholder receives an amount by way of an interest-free loan from the assurer in connection with an eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (11)). An interest-free loan received by a Policyholder from Utmost in connection with an EIB will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the amount transferred by the Policyholder to Units in the Fixed Account, and therefore the loan, comprises an adjustment for earnings referable to the Assets represented by the surrendered Allocated Units (and used to purchase Units in the Fixed Account). 50. Where, during the eligible period of an eligible policy, a policyholder receives an amount of consideration in respect of the assignment of that eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it is attributable to a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (12)). Any consideration received by a Policyholder in respect of an assignment of their EIB during its eligible period will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the consideration received is attributable to a bonus. 51. Pursuant to subparagraph 26AH(7)(a)(i), subsection 26AH(6) does not apply to assess an amount received under an eligible policy where the amount is received in consequence of the death of the person on whose life the policy was effected. Any amount as, or by way of, a bonus received under an EIB (as a portion of the Death Benefit) in consequence of the death of the Relevant Life Assured is therefore not assessable under subsection 26AH(6). Effect of increased premiums on eligible period 52. As an anti-avoidance measure, subsection 26AH(13) provides for a substituted date of commencement to apply if premiums increase by a certain amount from year to year. Where the premium payable under an eligible policy in relation to an assurance year exceeds by more than 25% the premium payable under the policy in the immediately preceding assurance year, the policy is deemed to have commenced at the beginning of the year in which the premium was increased. The effect of subsection 26AH(13) is to cause the 10-year eligible period in respect of an eligible policy to run from the commencement of that new period rather than from the date upon which the risk was first insured. 53. 'Where the premium payable is at the policyholder's discretion, the premium payable in relation to an assurance year is the total amount paid on the policy during that year' (paragraph 19 of IT 2346). In relation to the EIB, the amount invested across any assurance year (if any) is at the discretion of the Policyholder (subject to minimum amounts). Therefore, in relation to the EIB, the Premium payable for an assurance year is the total Premiums paid in an assurance year. 54. Where the Premium payable by a Policyholder in respect of an EIB in relation to an assurance year exceeds the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB is deemed by application of subsection 26AH(13) to have commenced at the beginning of the year in which the Premium was increased, rather than at the date of commencement of the period in respect of which the first Premium under the EIB was paid. 55. Where the Premium payable by a Policyholder in respect of an EIB in relation to each assurance year does not exceed the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB, for the purposes of the application of subsection 26AH(6), continues to run from the date of commencement of the period in respect of which the first Premium under the EIB was paid. Capital gain or capital loss from payments under the Executive Investment Bond disregarded 56. Under subsection 108-5(1) of the ITAA 1997, a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of a Policyholder and, as applicable, a Policyholder's nominated beneficiary or deceased estate under an EIB, are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. 57. Where Utmost makes a payment of a Surrender Value or part surrender benefit in satisfaction of a Policyholder's contractual rights under an EIB, their ownership of those rights is discharged or satisfied. Similarly, where Utmost makes a payment of a Death Benefit in satisfaction of a Policyholder's, a nominated beneficiary's or a Policyholder's deceased estate's contractual rights under an EIB, as applicable, their ownership of those rights is discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 58. The Policyholder, their nominated beneficiary or their deceased estate, as applicable, makes a capital gain from this CGT event if their capital proceeds from the ending of the ownership of their asset are more than the asset's cost base or, alternatively, a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997). 59. Section 118-300 of the ITAA 1997 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) of the ITAA 1997 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 Income tax: capital gains tax  is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression? ). 60. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to the original owner of the policy (other than the trustee of a complying superannuation entity). 61. As an entity to which the EIB is first issued, a Policyholder referred to in subparagraph 4(a) of this Ruling is regarded as an original owner of a policy of insurance on the life of an individual. Accordingly, that Policyholder is entitled under table item 3 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 62. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 63. On the assignment of ownership of an EIB for no consideration to a Policyholder referred to in subparagraph 4(b) of this Ruling, that Policyholder acquires an interest in the EIB for no consideration. A Policyholder referred to in subparagraph 4(b) of this Ruling is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 64. On the death of a Policyholder who is the Relevant Life Assured, the Policyholder's nominated beneficiary or deceased estate, as applicable, acquires an interest in the EIB for no consideration. The beneficiary or the deceased estate, as applicable, is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment of a Death Benefit by Utmost. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Class of entities or scheme: 13. Utmost, registered in the Isle of Man, issues (among other products) EIBs. Entities (Policyholders) capable of purchasing an EIB from Utmost are not residents of Australia for tax purposes at the time of issue. 14. At the Policyholder's discretion, an EIB is issued in the form of a single Policy or a number of separate Policies (known as a Cluster of Policies) each representing an equal proportion of the EIB. Where the EIB is set up as more than one Policy, the Policy Terms apply equally to each Policy. 15. Full details of the EIB, including the commitments and rights of both Utmost and a Policyholder, are contained in the Policy Terms. The Policy Terms are interpreted in accordance with, and are governed by, the law of the Isle of Man. | Portfolio Funds and Units: 16. To enable calculation of the benefits and charges under an EIB, Utmost creates notional units (referred to as Allocated Units or Units), each representing a proportionate share of the value of the Assets in a Portfolio Fund linked to the Policyholder's EIB. The Assets in the Portfolio Fund linked to the Policyholder are chosen by the Policyholder (or their Fund Adviser or Intermediary) from a broad selection of asset classes, subject to Utmost's acceptance, and may be changed by instruction from the Policyholder (or their Fund Adviser or Intermediary). 17. Allocated Units are allocated whenever a Premium is paid by the Policyholder and credited by Utmost to the Policyholder's Transaction Account, an account Utmost keeps to buy and sell Assets for the Portfolio Fund linked to the Policyholder, as well as for the payment of benefits. The percentage of the Policyholder's Premium used to calculate the number of Units allocated to their EIB each time they pay a Premium is referred to as the Allocation Percentage. 18. The value of the Portfolio Fund (and the price of the Allocated Units) is determined on the Contract Date and on each quarterly Valuation Date (Quarterly Date) thereafter. 19. While the Policyholder legally owns their EIB, they have no legal or beneficial interest in the Units, Portfolio Fund or any of the Assets therein, which remain the property of Utmost. Any appointed Custodian under the terms of the EIB is therefore custodian of Utmost, not the Policyholder. | Fixed Account loan withdrawals: 20. The Policyholder may at any time request that an amount less than the Surrender Value (as explained in paragraph 23 of this Ruling) be transferred from the Portfolio Fund (by surrender of Allocated Units for their Surrender Value) to Units in a Fixed Account. A Fixed Account is a separate and identifiable account maintained by Utmost for the purpose of granting interest-free loans. 21. The Policyholder may borrow up to the amount of the value of their Units in the Fixed Account (if any) interest-free. Repayment of such a loan may be made by the Policyholder while their EIB remains in force. On repayment, the: 22. As the Fixed Account does not earn interest or participate in capital growth, Units allocated in it maintain the same value at all times. | Surrender of a Policy: 23. The Policyholder can surrender one or more of their Policies and receive the Surrender Value, being the value of the Allocated Units allocated to the Policy (or Policies), less any outstanding charges. 24. Where the Policyholder totally surrenders one or more of their Policies: 25. Where the Policy ends by total surrender, the amount of any yet-to-be repaid loan procured by a Policyholder and funded by a transfer of funds to a Fixed Account (as per paragraph 20 of this Ruling) will be offset against the Surrender Value payable to the Policyholder. 26. Any part surrender of a Policyholder's Cluster of Policies may, on request by the Policyholder, be made regularly (each month, 2 months, quarter, 4 months, 6 months, or year, subject to minimum withdrawal limits and minimum Portfolio Fund value at the time) and must be made by selling Assets in each of those Policies. 27. The Policyholder can provide Utmost with instructions as to which Assets to realise to pay a part surrender benefit. If Utmost pays the Policyholder a part surrender benefit, then it will cancel Allocated Units to pay the benefit based on the price of those Units on the preceding Quarterly Date (or the Contract Date if there is none). 28. Any Surrender Value or part surrender benefit paid to the Policyholder on total or part surrender respectively consists of the Premium allocated to the cancelled Allocated Units, as adjusted for any earnings referrable to the Assets represented by those Allocated Units. 29. The Policyholder has no right to payment of the Surrender Value or part surrender benefit, as applicable, other than on surrender of their EIB either in whole or in part. | Death benefit: 30. The EIB is a whole-of-life assurance policy providing for a payment of a Death Benefit on the death of the Relevant Life Assured. Where multiple lives are assured under an EIB, the Relevant Life Assured is the last of the lives assured to die. A life assured under an EIB may or may not be that of the Policyholder. 31. The Death Benefit payable by Utmost is 101% of the Surrender Value, calculated on the Final Valuation Date that the last of the Assets have been realised and credited to the Transaction Account. 32. On payment of the Death Benefit the Allocated Units (subject to all Assets being sold or disposed of) will be cancelled, and (subject to paragraph 33 of this Ruling) no further benefit will be payable by Utmost under the EIB. 33. If there are any Units standing to the credit of the EIB in a Fixed Account then their value will also become payable on the death of the Relevant Life Assured. This part of the Death Benefit will be 100% of the value of the Units in the Fixed Account. Commissioner of Taxation 3 July 2024 | Application of section 26AH to the Executive Investment Bond: 34. All, or part of, amounts received as, or by way of, bonuses under certain life assurance policies (eligible policies) which otherwise would not be included in the assessable income of the recipient, are included in the assessable income of the recipient pursuant to subsection 26AH(6) when received within 10 years of the date on which the first or only premium paid under the policy was paid (eligible period). | The Executive Investment Bond is an eligible policy: 35. An eligible policy in respect of which section 26AH may apply is defined in subsection 26AH(1) to mean: 36. The term 'life assurance policy' is defined in subsection 6(1) as having the meaning given to life insurance policy by the ITAA 1997. A life insurance policy is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given to the expression 'life policy' in section 9 of the Life Insurance Act 1995 (LIA 1995). 37. A contract of insurance that provides for the payment of money on the death of a person and a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract, both constitute a life policy under paragraphs 9(1)(a) and (g) of the LIA 1995. 38. Some of the more general features of an investment-linked policy are described in paragraphs 5 and 6 of Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies  section 26AH  interpretation and operation as follows: 39. An EIB issued to a Policyholder referred to in paragraph 4 of this Ruling is an eligible policy for the purposes of section 26AH as it: | Treatment of benefits received under the Executive Investment Bond: 40. The term 'bonus' is not defined for the purposes of section 26AH but is explained at paragraph 8 of IT 2346 in the context of 'more traditional policies' (for example, endowment policies) as a guaranteed addition to the amount insured, payable when the amount insured is payable and representing both a form of participation by the policyholder in the issuing company's profits and a share in the surpluses derived by the issuing company during the period the policy is in force. Such a bonus, where received under an eligible policy that matures or is surrendered, forfeited or otherwise terminated within the eligible period of 10 years after commencement, falls within the scope of section 26AH. 41. The EIB, being an investment-linked policy, may be characterised as an unbundled life assurance contract (also referred to as an 'unbundled policy' in IT 2346). In the context of unbundled policies, paragraph 9 of IT 2346 explains: 42. The portion of a Surrender Value or any part surrender benefit comprising an adjustment for earnings referrable to the Assets represented by the cancelled Allocated Units and paid by Utmost from the balance of the Transaction Account maintained for each Policyholder that owns an EIB, is considered to be a bonus. This amount provides the Policyholder with participation in the profits of Utmost, as derived from the Assets in the Portfolio Fund linked to the Policyholder (but owned by Utmost) during the period the Policyholder's EIB is in force. 43. Payments of a bonus by Utmost from the balance of the Transaction Account maintained under an EIB are therefore subject to section 26AH and are not assessable under any other provision of the ITAA 1936 or the ITAA 1997. Specifically, a bonus received under an EIB is included as assessable income of a Policyholder pursuant to subsection 26AH(6) to the following extent: 44. To ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the policyholder under an eligible policy (that is, amounts previously received (including any amounts of bonus) and the surrender value at the time of forfeiture, surrender or other termination) exceeds the premiums paid under that eligible policy, subsection 26AH(8) provides, subject to any other matters the Commissioner considers relevant, a discretion for the Commissioner to exclude from assessable income the whole, or part of, an amount received as, or by way of, a bonus by reason of the forfeiture, surrender or other termination of an eligible policy, and which would otherwise be included in assessable income by the application of subsection 26AH(6) (see paragraph 10 of IT 2346). 45. Where a policyholder receives an amount under an eligible policy within the eligible period otherwise than as, or by way of, a bonus, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (see subsection 26AH(9)). No portion of a Surrender Value or part surrender benefit received by a Policyholder under an EIB otherwise than as or by way of a bonus (as referred to in subparagraph 9(b) of this Ruling) shall be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as if it had been received as or by way of a bonus. 46. Subject to subsection 26AH(5), subsection 26AH(4) operates to ensure that where an amount payable under an eligible policy is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder, they are taken to have received that amount under or in relation to that policy. Subsection 26AH(6) does not, however, apply to bonuses that are merely notionally credited during the life of the policy but cannot actually be received until it ends. In this regard, subsection 26AH(5) provides that subsection 26AH(4) does not apply to an amount in relation to an eligible policy that is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder so as to increase the surrender or maturity value that might reasonably be expected to be received under the policy. 47. An accretion in the value of the Portfolio Fund linked to a Policyholder, as calculated on a Valuation Date, constitutes a bonus that is merely accrued so as to increase the amount ultimately payable to the Policyholder on part or total surrender of their EIB, and pursuant to subsection 26AH(5) is not regarded as having been received by the Policyholder for the purposes of assessment under subsection 26AH(6). 48. A facility which allows policyholders of investment-linked policies to reclassify or vary the class or classes of assets supporting the policy is known as 'switching'. The rights or entitlements of the policyholder under the policy remain unchanged following exercise of the switching option, except that the future value of the policy will be calculated by reference to different assets, and subsection 26AH(4) does not apply in the manner explained in paragraph 46 of this Ruling (see Taxation Determination TD 94/82 Income tax: does section 26AH of the Income Tax Assessment Act 1936 apply when investment options are 'switched' under an eligible policy?) Switches of the Assets in the Portfolio Fund linked to the Policyholder involves the mere variation in the calculation base of their EIB such that subsection 26AH(4) does not apply, for the purposes of assessment under subsection 26AH(6), to take the Policyholder to have received an amount under or in relation to their EIB. 49. Where a policyholder receives an amount by way of an interest-free loan from the assurer in connection with an eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (11)). An interest-free loan received by a Policyholder from Utmost in connection with an EIB will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the amount transferred by the Policyholder to Units in the Fixed Account, and therefore the loan, comprises an adjustment for earnings referable to the Assets represented by the surrendered Allocated Units (and used to purchase Units in the Fixed Account). 50. Where, during the eligible period of an eligible policy, a policyholder receives an amount of consideration in respect of the assignment of that eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it is attributable to a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (12)). Any consideration received by a Policyholder in respect of an assignment of their EIB during its eligible period will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the consideration received is attributable to a bonus. 51. Pursuant to subparagraph 26AH(7)(a)(i), subsection 26AH(6) does not apply to assess an amount received under an eligible policy where the amount is received in consequence of the death of the person on whose life the policy was effected. Any amount as, or by way of, a bonus received under an EIB (as a portion of the Death Benefit) in consequence of the death of the Relevant Life Assured is therefore not assessable under subsection 26AH(6). | Effect of increased premiums on eligible period: 52. As an anti-avoidance measure, subsection 26AH(13) provides for a substituted date of commencement to apply if premiums increase by a certain amount from year to year. Where the premium payable under an eligible policy in relation to an assurance year exceeds by more than 25% the premium payable under the policy in the immediately preceding assurance year, the policy is deemed to have commenced at the beginning of the year in which the premium was increased. The effect of subsection 26AH(13) is to cause the 10-year eligible period in respect of an eligible policy to run from the commencement of that new period rather than from the date upon which the risk was first insured. 53. 'Where the premium payable is at the policyholder's discretion, the premium payable in relation to an assurance year is the total amount paid on the policy during that year' (paragraph 19 of IT 2346). In relation to the EIB, the amount invested across any assurance year (if any) is at the discretion of the Policyholder (subject to minimum amounts). Therefore, in relation to the EIB, the Premium payable for an assurance year is the total Premiums paid in an assurance year. 54. Where the Premium payable by a Policyholder in respect of an EIB in relation to an assurance year exceeds the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB is deemed by application of subsection 26AH(13) to have commenced at the beginning of the year in which the Premium was increased, rather than at the date of commencement of the period in respect of which the first Premium under the EIB was paid. 55. Where the Premium payable by a Policyholder in respect of an EIB in relation to each assurance year does not exceed the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB, for the purposes of the application of subsection 26AH(6), continues to run from the date of commencement of the period in respect of which the first Premium under the EIB was paid. | Capital gain or capital loss from payments under the Executive Investment Bond disregarded: 56. Under subsection 108-5(1) of the ITAA 1997, a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of a Policyholder and, as applicable, a Policyholder's nominated beneficiary or deceased estate under an EIB, are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. 57. Where Utmost makes a payment of a Surrender Value or part surrender benefit in satisfaction of a Policyholder's contractual rights under an EIB, their ownership of those rights is discharged or satisfied. Similarly, where Utmost makes a payment of a Death Benefit in satisfaction of a Policyholder's, a nominated beneficiary's or a Policyholder's deceased estate's contractual rights under an EIB, as applicable, their ownership of those rights is discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 58. The Policyholder, their nominated beneficiary or their deceased estate, as applicable, makes a capital gain from this CGT event if their capital proceeds from the ending of the ownership of their asset are more than the asset's cost base or, alternatively, a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997). 59. Section 118-300 of the ITAA 1997 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) of the ITAA 1997 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 Income tax: capital gains tax  is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression? ). 60. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to the original owner of the policy (other than the trustee of a complying superannuation entity). 61. As an entity to which the EIB is first issued, a Policyholder referred to in subparagraph 4(a) of this Ruling is regarded as an original owner of a policy of insurance on the life of an individual. Accordingly, that Policyholder is entitled under table item 3 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 62. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 63. On the assignment of ownership of an EIB for no consideration to a Policyholder referred to in subparagraph 4(b) of this Ruling, that Policyholder acquires an interest in the EIB for no consideration. A Policyholder referred to in subparagraph 4(b) of this Ruling is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 64. On the death of a Policyholder who is the Relevant Life Assured, the Policyholder's nominated beneficiary or deceased estate, as applicable, acquires an interest in the EIB for no consideration. The beneficiary or the deceased estate, as applicable, is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment of a Death Benefit by Utmost. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Ruling: 1. This Ruling sets out the income tax consequences for entities referred to in paragraph 4 of this Ruling in connection with an Executive Investment Bond (EIB) issued by Utmost International Isle of Man Limited (Utmost [1] ) and subject to the Executive Investment Bond Policy Terms (Policy Terms). 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1936, unless otherwise indicated. Terms which are defined in the Policy Terms (ref EIB4) referred to in paragraph 11 of this Ruling have been capitalised. 3. This Ruling does not address: | Who this Ruling applies to: 4. This Ruling applies to you if you are [2] : 5. This Ruling does not apply to you if you are not an entity listed in paragraph 4 of this Ruling. | Requirements of the Superannuation Industry (Supervision) Act 1993: 6. This Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993. 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 Ruling as to whether investment in this scheme may contravene the provisions of the Superannuation Industry (Supervision) Act 1993. 7. This Ruling applies from 1 July 2024 to entities specified in paragraph 4 of this Ruling. 8. However, the Ruling only applies and may be relied on to the extent that there is no change in the scheme or in the entity's involvement in the scheme. If the scheme carried out is materially different from the scheme described at paragraphs 11 to 33 of this Ruling, this Ruling cannot be relied upon and may be withdrawn or modified. 9. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 10 of this Ruling: | Assumptions: 10. This Ruling is made on the basis of the following necessary assumptions: 11. The scheme is identified and described in the following: Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under freedom of information legislation. 12. For the purposes of describing the scheme, there are no other agreements (whether formal or informal, and whether or not legally enforceable) which an entity referred to in paragraph 4 of this Ruling, or any associate of such entity, will be a party to which are a part of the scheme. | Overview of scheme: 13. Utmost, registered in the Isle of Man, issues (among other products) EIBs. Entities (Policyholders) capable of purchasing an EIB from Utmost are not residents of Australia for tax purposes at the time of issue. 14. At the Policyholder's discretion, an EIB is issued in the form of a single Policy or a number of separate Policies (known as a Cluster of Policies) each representing an equal proportion of the EIB. Where the EIB is set up as more than one Policy, the Policy Terms apply equally to each Policy. 15. Full details of the EIB, including the commitments and rights of both Utmost and a Policyholder, are contained in the Policy Terms. The Policy Terms are interpreted in accordance with, and are governed by, the law of the Isle of Man. | Portfolio Funds and Units: 16. To enable calculation of the benefits and charges under an EIB, Utmost creates notional units (referred to as Allocated Units or Units), each representing a proportionate share of the value of the Assets in a Portfolio Fund linked to the Policyholder's EIB. The Assets in the Portfolio Fund linked to the Policyholder are chosen by the Policyholder (or their Fund Adviser or Intermediary) from a broad selection of asset classes, subject to Utmost's acceptance, and may be changed by instruction from the Policyholder (or their Fund Adviser or Intermediary). 17. Allocated Units are allocated whenever a Premium is paid by the Policyholder and credited by Utmost to the Policyholder's Transaction Account, an account Utmost keeps to buy and sell Assets for the Portfolio Fund linked to the Policyholder, as well as for the payment of benefits. The percentage of the Policyholder's Premium used to calculate the number of Units allocated to their EIB each time they pay a Premium is referred to as the Allocation Percentage. 18. The value of the Portfolio Fund (and the price of the Allocated Units) is determined on the Contract Date and on each quarterly Valuation Date (Quarterly Date) thereafter. 19. While the Policyholder legally owns their EIB, they have no legal or beneficial interest in the Units, Portfolio Fund or any of the Assets therein, which remain the property of Utmost. Any appointed Custodian under the terms of the EIB is therefore custodian of Utmost, not the Policyholder. | Fixed Account loan withdrawals: 20. The Policyholder may at any time request that an amount less than the Surrender Value (as explained in paragraph 23 of this Ruling) be transferred from the Portfolio Fund (by surrender of Allocated Units for their Surrender Value) to Units in a Fixed Account. A Fixed Account is a separate and identifiable account maintained by Utmost for the purpose of granting interest-free loans. 21. The Policyholder may borrow up to the amount of the value of their Units in the Fixed Account (if any) interest-free. Repayment of such a loan may be made by the Policyholder while their EIB remains in force. On repayment, the: 22. As the Fixed Account does not earn interest or participate in capital growth, Units allocated in it maintain the same value at all times. | Surrender of a Policy: 23. The Policyholder can surrender one or more of their Policies and receive the Surrender Value, being the value of the Allocated Units allocated to the Policy (or Policies), less any outstanding charges. 24. Where the Policyholder totally surrenders one or more of their Policies: 25. Where the Policy ends by total surrender, the amount of any yet-to-be repaid loan procured by a Policyholder and funded by a transfer of funds to a Fixed Account (as per paragraph 20 of this Ruling) will be offset against the Surrender Value payable to the Policyholder. 26. Any part surrender of a Policyholder's Cluster of Policies may, on request by the Policyholder, be made regularly (each month, 2 months, quarter, 4 months, 6 months, or year, subject to minimum withdrawal limits and minimum Portfolio Fund value at the time) and must be made by selling Assets in each of those Policies. 27. The Policyholder can provide Utmost with instructions as to which Assets to realise to pay a part surrender benefit. If Utmost pays the Policyholder a part surrender benefit, then it will cancel Allocated Units to pay the benefit based on the price of those Units on the preceding Quarterly Date (or the Contract Date if there is none). 28. Any Surrender Value or part surrender benefit paid to the Policyholder on total or part surrender respectively consists of the Premium allocated to the cancelled Allocated Units, as adjusted for any earnings referrable to the Assets represented by those Allocated Units. 29. The Policyholder has no right to payment of the Surrender Value or part surrender benefit, as applicable, other than on surrender of their EIB either in whole or in part. | Death benefit: 30. The EIB is a whole-of-life assurance policy providing for a payment of a Death Benefit on the death of the Relevant Life Assured. Where multiple lives are assured under an EIB, the Relevant Life Assured is the last of the lives assured to die. A life assured under an EIB may or may not be that of the Policyholder. 31. The Death Benefit payable by Utmost is 101% of the Surrender Value, calculated on the Final Valuation Date that the last of the Assets have been realised and credited to the Transaction Account. 32. On payment of the Death Benefit the Allocated Units (subject to all Assets being sold or disposed of) will be cancelled, and (subject to paragraph 33 of this Ruling) no further benefit will be payable by Utmost under the EIB. 33. If there are any Units standing to the credit of the EIB in a Fixed Account then their value will also become payable on the death of the Relevant Life Assured. This part of the Death Benefit will be 100% of the value of the Units in the Fixed Account. Commissioner of Taxation 3 July 2024 | Application of section 26AH to the Executive Investment Bond: 34. All, or part of, amounts received as, or by way of, bonuses under certain life assurance policies (eligible policies) which otherwise would not be included in the assessable income of the recipient, are included in the assessable income of the recipient pursuant to subsection 26AH(6) when received within 10 years of the date on which the first or only premium paid under the policy was paid (eligible period). | The Executive Investment Bond is an eligible policy: 35. An eligible policy in respect of which section 26AH may apply is defined in subsection 26AH(1) to mean: 36. The term 'life assurance policy' is defined in subsection 6(1) as having the meaning given to life insurance policy by the ITAA 1997. A life insurance policy is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given to the expression 'life policy' in section 9 of the Life Insurance Act 1995 (LIA 1995). 37. A contract of insurance that provides for the payment of money on the death of a person and a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract, both constitute a life policy under paragraphs 9(1)(a) and (g) of the LIA 1995. 38. Some of the more general features of an investment-linked policy are described in paragraphs 5 and 6 of Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies  section 26AH  interpretation and operation as follows: 39. An EIB issued to a Policyholder referred to in paragraph 4 of this Ruling is an eligible policy for the purposes of section 26AH as it: | Treatment of benefits received under the Executive Investment Bond: 40. The term 'bonus' is not defined for the purposes of section 26AH but is explained at paragraph 8 of IT 2346 in the context of 'more traditional policies' (for example, endowment policies) as a guaranteed addition to the amount insured, payable when the amount insured is payable and representing both a form of participation by the policyholder in the issuing company's profits and a share in the surpluses derived by the issuing company during the period the policy is in force. Such a bonus, where received under an eligible policy that matures or is surrendered, forfeited or otherwise terminated within the eligible period of 10 years after commencement, falls within the scope of section 26AH. 41. The EIB, being an investment-linked policy, may be characterised as an unbundled life assurance contract (also referred to as an 'unbundled policy' in IT 2346). In the context of unbundled policies, paragraph 9 of IT 2346 explains: 42. The portion of a Surrender Value or any part surrender benefit comprising an adjustment for earnings referrable to the Assets represented by the cancelled Allocated Units and paid by Utmost from the balance of the Transaction Account maintained for each Policyholder that owns an EIB, is considered to be a bonus. This amount provides the Policyholder with participation in the profits of Utmost, as derived from the Assets in the Portfolio Fund linked to the Policyholder (but owned by Utmost) during the period the Policyholder's EIB is in force. 43. Payments of a bonus by Utmost from the balance of the Transaction Account maintained under an EIB are therefore subject to section 26AH and are not assessable under any other provision of the ITAA 1936 or the ITAA 1997. Specifically, a bonus received under an EIB is included as assessable income of a Policyholder pursuant to subsection 26AH(6) to the following extent: 44. To ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the policyholder under an eligible policy (that is, amounts previously received (including any amounts of bonus) and the surrender value at the time of forfeiture, surrender or other termination) exceeds the premiums paid under that eligible policy, subsection 26AH(8) provides, subject to any other matters the Commissioner considers relevant, a discretion for the Commissioner to exclude from assessable income the whole, or part of, an amount received as, or by way of, a bonus by reason of the forfeiture, surrender or other termination of an eligible policy, and which would otherwise be included in assessable income by the application of subsection 26AH(6) (see paragraph 10 of IT 2346). 45. Where a policyholder receives an amount under an eligible policy within the eligible period otherwise than as, or by way of, a bonus, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (see subsection 26AH(9)). No portion of a Surrender Value or part surrender benefit received by a Policyholder under an EIB otherwise than as or by way of a bonus (as referred to in subparagraph 9(b) of this Ruling) shall be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as if it had been received as or by way of a bonus. 46. Subject to subsection 26AH(5), subsection 26AH(4) operates to ensure that where an amount payable under an eligible policy is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder, they are taken to have received that amount under or in relation to that policy. Subsection 26AH(6) does not, however, apply to bonuses that are merely notionally credited during the life of the policy but cannot actually be received until it ends. In this regard, subsection 26AH(5) provides that subsection 26AH(4) does not apply to an amount in relation to an eligible policy that is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder so as to increase the surrender or maturity value that might reasonably be expected to be received under the policy. 47. An accretion in the value of the Portfolio Fund linked to a Policyholder, as calculated on a Valuation Date, constitutes a bonus that is merely accrued so as to increase the amount ultimately payable to the Policyholder on part or total surrender of their EIB, and pursuant to subsection 26AH(5) is not regarded as having been received by the Policyholder for the purposes of assessment under subsection 26AH(6). 48. A facility which allows policyholders of investment-linked policies to reclassify or vary the class or classes of assets supporting the policy is known as 'switching'. The rights or entitlements of the policyholder under the policy remain unchanged following exercise of the switching option, except that the future value of the policy will be calculated by reference to different assets, and subsection 26AH(4) does not apply in the manner explained in paragraph 46 of this Ruling (see Taxation Determination TD 94/82 Income tax: does section 26AH of the Income Tax Assessment Act 1936 apply when investment options are 'switched' under an eligible policy?) Switches of the Assets in the Portfolio Fund linked to the Policyholder involves the mere variation in the calculation base of their EIB such that subsection 26AH(4) does not apply, for the purposes of assessment under subsection 26AH(6), to take the Policyholder to have received an amount under or in relation to their EIB. 49. Where a policyholder receives an amount by way of an interest-free loan from the assurer in connection with an eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (11)). An interest-free loan received by a Policyholder from Utmost in connection with an EIB will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the amount transferred by the Policyholder to Units in the Fixed Account, and therefore the loan, comprises an adjustment for earnings referable to the Assets represented by the surrendered Allocated Units (and used to purchase Units in the Fixed Account). 50. Where, during the eligible period of an eligible policy, a policyholder receives an amount of consideration in respect of the assignment of that eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it is attributable to a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (12)). Any consideration received by a Policyholder in respect of an assignment of their EIB during its eligible period will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the consideration received is attributable to a bonus. 51. Pursuant to subparagraph 26AH(7)(a)(i), subsection 26AH(6) does not apply to assess an amount received under an eligible policy where the amount is received in consequence of the death of the person on whose life the policy was effected. Any amount as, or by way of, a bonus received under an EIB (as a portion of the Death Benefit) in consequence of the death of the Relevant Life Assured is therefore not assessable under subsection 26AH(6). | Effect of increased premiums on eligible period: 52. As an anti-avoidance measure, subsection 26AH(13) provides for a substituted date of commencement to apply if premiums increase by a certain amount from year to year. Where the premium payable under an eligible policy in relation to an assurance year exceeds by more than 25% the premium payable under the policy in the immediately preceding assurance year, the policy is deemed to have commenced at the beginning of the year in which the premium was increased. The effect of subsection 26AH(13) is to cause the 10-year eligible period in respect of an eligible policy to run from the commencement of that new period rather than from the date upon which the risk was first insured. 53. 'Where the premium payable is at the policyholder's discretion, the premium payable in relation to an assurance year is the total amount paid on the policy during that year' (paragraph 19 of IT 2346). In relation to the EIB, the amount invested across any assurance year (if any) is at the discretion of the Policyholder (subject to minimum amounts). Therefore, in relation to the EIB, the Premium payable for an assurance year is the total Premiums paid in an assurance year. 54. Where the Premium payable by a Policyholder in respect of an EIB in relation to an assurance year exceeds the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB is deemed by application of subsection 26AH(13) to have commenced at the beginning of the year in which the Premium was increased, rather than at the date of commencement of the period in respect of which the first Premium under the EIB was paid. 55. Where the Premium payable by a Policyholder in respect of an EIB in relation to each assurance year does not exceed the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB, for the purposes of the application of subsection 26AH(6), continues to run from the date of commencement of the period in respect of which the first Premium under the EIB was paid. | Capital gain or capital loss from payments under the Executive Investment Bond disregarded: 56. Under subsection 108-5(1) of the ITAA 1997, a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of a Policyholder and, as applicable, a Policyholder's nominated beneficiary or deceased estate under an EIB, are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. 57. Where Utmost makes a payment of a Surrender Value or part surrender benefit in satisfaction of a Policyholder's contractual rights under an EIB, their ownership of those rights is discharged or satisfied. Similarly, where Utmost makes a payment of a Death Benefit in satisfaction of a Policyholder's, a nominated beneficiary's or a Policyholder's deceased estate's contractual rights under an EIB, as applicable, their ownership of those rights is discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 58. The Policyholder, their nominated beneficiary or their deceased estate, as applicable, makes a capital gain from this CGT event if their capital proceeds from the ending of the ownership of their asset are more than the asset's cost base or, alternatively, a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997). 59. Section 118-300 of the ITAA 1997 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) of the ITAA 1997 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 Income tax: capital gains tax  is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression? ). 60. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to the original owner of the policy (other than the trustee of a complying superannuation entity). 61. As an entity to which the EIB is first issued, a Policyholder referred to in subparagraph 4(a) of this Ruling is regarded as an original owner of a policy of insurance on the life of an individual. Accordingly, that Policyholder is entitled under table item 3 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 62. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 63. On the assignment of ownership of an EIB for no consideration to a Policyholder referred to in subparagraph 4(b) of this Ruling, that Policyholder acquires an interest in the EIB for no consideration. A Policyholder referred to in subparagraph 4(b) of this Ruling is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 64. On the death of a Policyholder who is the Relevant Life Assured, the Policyholder's nominated beneficiary or deceased estate, as applicable, acquires an interest in the EIB for no consideration. The beneficiary or the deceased estate, as applicable, is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment of a Death Benefit by Utmost. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).


Appendix: Application of section 26AH to the Executive Investment Bond: 34. All, or part of, amounts received as, or by way of, bonuses under certain life assurance policies (eligible policies) which otherwise would not be included in the assessable income of the recipient, are included in the assessable income of the recipient pursuant to subsection 26AH(6) when received within 10 years of the date on which the first or only premium paid under the policy was paid (eligible period). | The Executive Investment Bond is an eligible policy: 35. An eligible policy in respect of which section 26AH may apply is defined in subsection 26AH(1) to mean: 36. The term 'life assurance policy' is defined in subsection 6(1) as having the meaning given to life insurance policy by the ITAA 1997. A life insurance policy is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given to the expression 'life policy' in section 9 of the Life Insurance Act 1995 (LIA 1995). 37. A contract of insurance that provides for the payment of money on the death of a person and a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract, both constitute a life policy under paragraphs 9(1)(a) and (g) of the LIA 1995. 38. Some of the more general features of an investment-linked policy are described in paragraphs 5 and 6 of Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies  section 26AH  interpretation and operation as follows: 39. An EIB issued to a Policyholder referred to in paragraph 4 of this Ruling is an eligible policy for the purposes of section 26AH as it: | Treatment of benefits received under the Executive Investment Bond: 40. The term 'bonus' is not defined for the purposes of section 26AH but is explained at paragraph 8 of IT 2346 in the context of 'more traditional policies' (for example, endowment policies) as a guaranteed addition to the amount insured, payable when the amount insured is payable and representing both a form of participation by the policyholder in the issuing company's profits and a share in the surpluses derived by the issuing company during the period the policy is in force. Such a bonus, where received under an eligible policy that matures or is surrendered, forfeited or otherwise terminated within the eligible period of 10 years after commencement, falls within the scope of section 26AH. 41. The EIB, being an investment-linked policy, may be characterised as an unbundled life assurance contract (also referred to as an 'unbundled policy' in IT 2346). In the context of unbundled policies, paragraph 9 of IT 2346 explains: 42. The portion of a Surrender Value or any part surrender benefit comprising an adjustment for earnings referrable to the Assets represented by the cancelled Allocated Units and paid by Utmost from the balance of the Transaction Account maintained for each Policyholder that owns an EIB, is considered to be a bonus. This amount provides the Policyholder with participation in the profits of Utmost, as derived from the Assets in the Portfolio Fund linked to the Policyholder (but owned by Utmost) during the period the Policyholder's EIB is in force. 43. Payments of a bonus by Utmost from the balance of the Transaction Account maintained under an EIB are therefore subject to section 26AH and are not assessable under any other provision of the ITAA 1936 or the ITAA 1997. Specifically, a bonus received under an EIB is included as assessable income of a Policyholder pursuant to subsection 26AH(6) to the following extent: 44. To ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the policyholder under an eligible policy (that is, amounts previously received (including any amounts of bonus) and the surrender value at the time of forfeiture, surrender or other termination) exceeds the premiums paid under that eligible policy, subsection 26AH(8) provides, subject to any other matters the Commissioner considers relevant, a discretion for the Commissioner to exclude from assessable income the whole, or part of, an amount received as, or by way of, a bonus by reason of the forfeiture, surrender or other termination of an eligible policy, and which would otherwise be included in assessable income by the application of subsection 26AH(6) (see paragraph 10 of IT 2346). 45. Where a policyholder receives an amount under an eligible policy within the eligible period otherwise than as, or by way of, a bonus, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (see subsection 26AH(9)). No portion of a Surrender Value or part surrender benefit received by a Policyholder under an EIB otherwise than as or by way of a bonus (as referred to in subparagraph 9(b) of this Ruling) shall be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as if it had been received as or by way of a bonus. 46. Subject to subsection 26AH(5), subsection 26AH(4) operates to ensure that where an amount payable under an eligible policy is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder, they are taken to have received that amount under or in relation to that policy. Subsection 26AH(6) does not, however, apply to bonuses that are merely notionally credited during the life of the policy but cannot actually be received until it ends. In this regard, subsection 26AH(5) provides that subsection 26AH(4) does not apply to an amount in relation to an eligible policy that is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder so as to increase the surrender or maturity value that might reasonably be expected to be received under the policy. 47. An accretion in the value of the Portfolio Fund linked to a Policyholder, as calculated on a Valuation Date, constitutes a bonus that is merely accrued so as to increase the amount ultimately payable to the Policyholder on part or total surrender of their EIB, and pursuant to subsection 26AH(5) is not regarded as having been received by the Policyholder for the purposes of assessment under subsection 26AH(6). 48. A facility which allows policyholders of investment-linked policies to reclassify or vary the class or classes of assets supporting the policy is known as 'switching'. The rights or entitlements of the policyholder under the policy remain unchanged following exercise of the switching option, except that the future value of the policy will be calculated by reference to different assets, and subsection 26AH(4) does not apply in the manner explained in paragraph 46 of this Ruling (see Taxation Determination TD 94/82 Income tax: does section 26AH of the Income Tax Assessment Act 1936 apply when investment options are 'switched' under an eligible policy?) Switches of the Assets in the Portfolio Fund linked to the Policyholder involves the mere variation in the calculation base of their EIB such that subsection 26AH(4) does not apply, for the purposes of assessment under subsection 26AH(6), to take the Policyholder to have received an amount under or in relation to their EIB. 49. Where a policyholder receives an amount by way of an interest-free loan from the assurer in connection with an eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (11)). An interest-free loan received by a Policyholder from Utmost in connection with an EIB will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the amount transferred by the Policyholder to Units in the Fixed Account, and therefore the loan, comprises an adjustment for earnings referable to the Assets represented by the surrendered Allocated Units (and used to purchase Units in the Fixed Account). 50. Where, during the eligible period of an eligible policy, a policyholder receives an amount of consideration in respect of the assignment of that eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it is attributable to a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (12)). Any consideration received by a Policyholder in respect of an assignment of their EIB during its eligible period will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the consideration received is attributable to a bonus. 51. Pursuant to subparagraph 26AH(7)(a)(i), subsection 26AH(6) does not apply to assess an amount received under an eligible policy where the amount is received in consequence of the death of the person on whose life the policy was effected. Any amount as, or by way of, a bonus received under an EIB (as a portion of the Death Benefit) in consequence of the death of the Relevant Life Assured is therefore not assessable under subsection 26AH(6). | Effect of increased premiums on eligible period: 52. As an anti-avoidance measure, subsection 26AH(13) provides for a substituted date of commencement to apply if premiums increase by a certain amount from year to year. Where the premium payable under an eligible policy in relation to an assurance year exceeds by more than 25% the premium payable under the policy in the immediately preceding assurance year, the policy is deemed to have commenced at the beginning of the year in which the premium was increased. The effect of subsection 26AH(13) is to cause the 10-year eligible period in respect of an eligible policy to run from the commencement of that new period rather than from the date upon which the risk was first insured. 53. 'Where the premium payable is at the policyholder's discretion, the premium payable in relation to an assurance year is the total amount paid on the policy during that year' (paragraph 19 of IT 2346). In relation to the EIB, the amount invested across any assurance year (if any) is at the discretion of the Policyholder (subject to minimum amounts). Therefore, in relation to the EIB, the Premium payable for an assurance year is the total Premiums paid in an assurance year. 54. Where the Premium payable by a Policyholder in respect of an EIB in relation to an assurance year exceeds the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB is deemed by application of subsection 26AH(13) to have commenced at the beginning of the year in which the Premium was increased, rather than at the date of commencement of the period in respect of which the first Premium under the EIB was paid. 55. Where the Premium payable by a Policyholder in respect of an EIB in relation to each assurance year does not exceed the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB, for the purposes of the application of subsection 26AH(6), continues to run from the date of commencement of the period in respect of which the first Premium under the EIB was paid. | Capital gain or capital loss from payments under the Executive Investment Bond disregarded: 56. Under subsection 108-5(1) of the ITAA 1997, a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of a Policyholder and, as applicable, a Policyholder's nominated beneficiary or deceased estate under an EIB, are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. 57. Where Utmost makes a payment of a Surrender Value or part surrender benefit in satisfaction of a Policyholder's contractual rights under an EIB, their ownership of those rights is discharged or satisfied. Similarly, where Utmost makes a payment of a Death Benefit in satisfaction of a Policyholder's, a nominated beneficiary's or a Policyholder's deceased estate's contractual rights under an EIB, as applicable, their ownership of those rights is discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 58. The Policyholder, their nominated beneficiary or their deceased estate, as applicable, makes a capital gain from this CGT event if their capital proceeds from the ending of the ownership of their asset are more than the asset's cost base or, alternatively, a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997). 59. Section 118-300 of the ITAA 1997 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) of the ITAA 1997 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 Income tax: capital gains tax  is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression? ). 60. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to the original owner of the policy (other than the trustee of a complying superannuation entity). 61. As an entity to which the EIB is first issued, a Policyholder referred to in subparagraph 4(a) of this Ruling is regarded as an original owner of a policy of insurance on the life of an individual. Accordingly, that Policyholder is entitled under table item 3 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 62. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 63. On the assignment of ownership of an EIB for no consideration to a Policyholder referred to in subparagraph 4(b) of this Ruling, that Policyholder acquires an interest in the EIB for no consideration. A Policyholder referred to in subparagraph 4(b) of this Ruling is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 64. On the death of a Policyholder who is the Relevant Life Assured, the Policyholder's nominated beneficiary or deceased estate, as applicable, acquires an interest in the EIB for no consideration. The beneficiary or the deceased estate, as applicable, is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment of a Death Benefit by Utmost. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).


What this Ruling is about | If this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling. | This Ruling has been given on the basis that the entity who applied for the 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 Ruling. | 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. | ... a life assurance policy in relation to which the date of commencement of risk is after 27 August 1982, other than a funeral policy (as defined in the Income Tax Assessment Act 1997) issued on or after 1 January 2003. | 5. ... A contract providing a death benefit, and an investment account the value of which is directly linked to the performance of a specific investment portfolio. The value of the policyholder's interest will rise and fall with the movements in the value of the portfolio. ... | 6. Premiums in respect of an unbundled policy may be paid in a lump sum or annually, or the policyholder may elect to vary the amount of the premium by making additional payments under the policy at any time. A further feature of these types of policies is that they generally allow the policyholder to surrender a part of the policy at any time (a 'partial surrender'). | In the case of unbundled policies, the concept of bonuses representing the profit or gain element passed on to the policyholder is maintained for the purposes of section 26AH. For example, where a policy is linked to the purchase and sale of investment units, the profit derived on the sale of those units is, when paid to the policyholder, regarded as a payment by way of a bonus.

Withdrawal notice: 20. The Policyholder may at any time request that an amount less than the Surrender Value (as explained in paragraph 23 of this Ruling) be transferred from the Portfolio Fund (by surrender of Allocated Units for their Surrender Value) to Units in a Fixed Account. A Fixed Account is a separate and identifiable account maintained by Utmost for the purpose of granting interest-free loans. 21. The Policyholder may borrow up to the amount of the value of their Units in the Fixed Account (if any) interest-free. Repayment of such a loan may be made by the Policyholder while their EIB remains in force. On repayment, the: 22. As the Fixed Account does not earn interest or participate in capital growth, Units allocated in it maintain the same value at all times. Surrender of a Policy 23. The Policyholder can surrender one or more of their Policies and receive the Surrender Value, being the value of the Allocated Units allocated to the Policy (or Policies), less any outstanding charges. 24. Where the Policyholder totally surrenders one or more of their Policies: 25. Where the Policy ends by total surrender, the amount of any yet-to-be repaid loan procured by a Policyholder and funded by a transfer of funds to a Fixed Account (as per paragraph 20 of this Ruling) will be offset against the Surrender Value payable to the Policyholder. 26. Any part surrender of a Policyholder's Cluster of Policies may, on request by the Policyholder, be made regularly (each month, 2 months, quarter, 4 months, 6 months, or year, subject to minimum withdrawal limits and minimum Portfolio Fund value at the time) and must be made by selling Assets in each of those Policies. 27. The Policyholder can provide Utmost with instructions as to which Assets to realise to pay a part surrender benefit. If Utmost pays the Policyholder a part surrender benefit, then it will cancel Allocated Units to pay the benefit based on the price of those Units on the preceding Quarterly Date (or the Contract Date if there is none). 28. Any Surrender Value or part surrender benefit paid to the Policyholder on total or part surrender respectively consists of the Premium allocated to the cancelled Allocated Units, as adjusted for any earnings referrable to the Assets represented by those Allocated Units. 29. The Policyholder has no right to payment of the Surrender Value or part surrender benefit, as applicable, other than on surrender of their EIB either in whole or in part. Death benefit 30. The EIB is a whole-of-life assurance policy providing for a payment of a Death Benefit on the death of the Relevant Life Assured. Where multiple lives are assured under an EIB, the Relevant Life Assured is the last of the lives assured to die. A life assured under an EIB may or may not be that of the Policyholder. 31. The Death Benefit payable by Utmost is 101% of the Surrender Value, calculated on the Final Valuation Date that the last of the Assets have been realised and credited to the Transaction Account. 32. On payment of the Death Benefit the Allocated Units (subject to all Assets being sold or disposed of) will be cancelled, and (subject to paragraph 33 of this Ruling) no further benefit will be payable by Utmost under the EIB. 33. If there are any Units standing to the credit of the EIB in a Fixed Account then their value will also become payable on the death of the Relevant Life Assured. This part of the Death Benefit will be 100% of the value of the Units in the Fixed Account. Commissioner of Taxation 3 July 2024 Application of section 26AH to the Executive Investment Bond 34. All, or part of, amounts received as, or by way of, bonuses under certain life assurance policies (eligible policies) which otherwise would not be included in the assessable income of the recipient, are included in the assessable income of the recipient pursuant to subsection 26AH(6) when received within 10 years of the date on which the first or only premium paid under the policy was paid (eligible period). The Executive Investment Bond is an eligible policy 35. An eligible policy in respect of which section 26AH may apply is defined in subsection 26AH(1) to mean: 36. The term 'life assurance policy' is defined in subsection 6(1) as having the meaning given to life insurance policy by the ITAA 1997. A life insurance policy is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given to the expression 'life policy' in section 9 of the Life Insurance Act 1995 (LIA 1995). 37. A contract of insurance that provides for the payment of money on the death of a person and a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract, both constitute a life policy under paragraphs 9(1)(a) and (g) of the LIA 1995. 38. Some of the more general features of an investment-linked policy are described in paragraphs 5 and 6 of Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies  section 26AH  interpretation and operation as follows: 39. An EIB issued to a Policyholder referred to in paragraph 4 of this Ruling is an eligible policy for the purposes of section 26AH as it: Treatment of benefits received under the Executive Investment Bond 40. The term 'bonus' is not defined for the purposes of section 26AH but is explained at paragraph 8 of IT 2346 in the context of 'more traditional policies' (for example, endowment policies) as a guaranteed addition to the amount insured, payable when the amount insured is payable and representing both a form of participation by the policyholder in the issuing company's profits and a share in the surpluses derived by the issuing company during the period the policy is in force. Such a bonus, where received under an eligible policy that matures or is surrendered, forfeited or otherwise terminated within the eligible period of 10 years after commencement, falls within the scope of section 26AH. 41. The EIB, being an investment-linked policy, may be characterised as an unbundled life assurance contract (also referred to as an 'unbundled policy' in IT 2346). In the context of unbundled policies, paragraph 9 of IT 2346 explains: 42. The portion of a Surrender Value or any part surrender benefit comprising an adjustment for earnings referrable to the Assets represented by the cancelled Allocated Units and paid by Utmost from the balance of the Transaction Account maintained for each Policyholder that owns an EIB, is considered to be a bonus. This amount provides the Policyholder with participation in the profits of Utmost, as derived from the Assets in the Portfolio Fund linked to the Policyholder (but owned by Utmost) during the period the Policyholder's EIB is in force. 43. Payments of a bonus by Utmost from the balance of the Transaction Account maintained under an EIB are therefore subject to section 26AH and are not assessable under any other provision of the ITAA 1936 or the ITAA 1997. Specifically, a bonus received under an EIB is included as assessable income of a Policyholder pursuant to subsection 26AH(6) to the following extent: 44. To ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the policyholder under an eligible policy (that is, amounts previously received (including any amounts of bonus) and the surrender value at the time of forfeiture, surrender or other termination) exceeds the premiums paid under that eligible policy, subsection 26AH(8) provides, subject to any other matters the Commissioner considers relevant, a discretion for the Commissioner to exclude from assessable income the whole, or part of, an amount received as, or by way of, a bonus by reason of the forfeiture, surrender or other termination of an eligible policy, and which would otherwise be included in assessable income by the application of subsection 26AH(6) (see paragraph 10 of IT 2346). 45. Where a policyholder receives an amount under an eligible policy within the eligible period otherwise than as, or by way of, a bonus, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (see subsection 26AH(9)). No portion of a Surrender Value or part surrender benefit received by a Policyholder under an EIB otherwise than as or by way of a bonus (as referred to in subparagraph 9(b) of this Ruling) shall be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as if it had been received as or by way of a bonus. 46. Subject to subsection 26AH(5), subsection 26AH(4) operates to ensure that where an amount payable under an eligible policy is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder, they are taken to have received that amount under or in relation to that policy. Subsection 26AH(6) does not, however, apply to bonuses that are merely notionally credited during the life of the policy but cannot actually be received until it ends. In this regard, subsection 26AH(5) provides that subsection 26AH(4) does not apply to an amount in relation to an eligible policy that is reinvested or otherwise dealt with on behalf of or at the direction of the policyholder so as to increase the surrender or maturity value that might reasonably be expected to be received under the policy. 47. An accretion in the value of the Portfolio Fund linked to a Policyholder, as calculated on a Valuation Date, constitutes a bonus that is merely accrued so as to increase the amount ultimately payable to the Policyholder on part or total surrender of their EIB, and pursuant to subsection 26AH(5) is not regarded as having been received by the Policyholder for the purposes of assessment under subsection 26AH(6). 48. A facility which allows policyholders of investment-linked policies to reclassify or vary the class or classes of assets supporting the policy is known as 'switching'. The rights or entitlements of the policyholder under the policy remain unchanged following exercise of the switching option, except that the future value of the policy will be calculated by reference to different assets, and subsection 26AH(4) does not apply in the manner explained in paragraph 46 of this Ruling (see Taxation Determination TD 94/82 Income tax: does section 26AH of the Income Tax Assessment Act 1936 apply when investment options are 'switched' under an eligible policy?) Switches of the Assets in the Portfolio Fund linked to the Policyholder involves the mere variation in the calculation base of their EIB such that subsection 26AH(4) does not apply, for the purposes of assessment under subsection 26AH(6), to take the Policyholder to have received an amount under or in relation to their EIB. 49. Where a policyholder receives an amount by way of an interest-free loan from the assurer in connection with an eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it represents a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (11)). An interest-free loan received by a Policyholder from Utmost in connection with an EIB will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the amount transferred by the Policyholder to Units in the Fixed Account, and therefore the loan, comprises an adjustment for earnings referable to the Assets represented by the surrendered Allocated Units (and used to purchase Units in the Fixed Account). 50. Where, during the eligible period of an eligible policy, a policyholder receives an amount of consideration in respect of the assignment of that eligible policy, that amount is assessable under subsection 26AH(6) as if it had been received as a bonus to the extent that, in the Commissioner's opinion, it is attributable to a bonus that has accrued or been declared, or a bonus that can reasonably be expected to accrue (subsections 26AH(9) and (12)). Any consideration received by a Policyholder in respect of an assignment of their EIB during its eligible period will, for the purposes of subsection 26AH(6), be deemed pursuant to subsection 26AH(9) to have been received by the Policyholder as or by way of a bonus to the extent that the consideration received is attributable to a bonus. 51. Pursuant to subparagraph 26AH(7)(a)(i), subsection 26AH(6) does not apply to assess an amount received under an eligible policy where the amount is received in consequence of the death of the person on whose life the policy was effected. Any amount as, or by way of, a bonus received under an EIB (as a portion of the Death Benefit) in consequence of the death of the Relevant Life Assured is therefore not assessable under subsection 26AH(6). Effect of increased premiums on eligible period 52. As an anti-avoidance measure, subsection 26AH(13) provides for a substituted date of commencement to apply if premiums increase by a certain amount from year to year. Where the premium payable under an eligible policy in relation to an assurance year exceeds by more than 25% the premium payable under the policy in the immediately preceding assurance year, the policy is deemed to have commenced at the beginning of the year in which the premium was increased. The effect of subsection 26AH(13) is to cause the 10-year eligible period in respect of an eligible policy to run from the commencement of that new period rather than from the date upon which the risk was first insured. 53. 'Where the premium payable is at the policyholder's discretion, the premium payable in relation to an assurance year is the total amount paid on the policy during that year' (paragraph 19 of IT 2346). In relation to the EIB, the amount invested across any assurance year (if any) is at the discretion of the Policyholder (subject to minimum amounts). Therefore, in relation to the EIB, the Premium payable for an assurance year is the total Premiums paid in an assurance year. 54. Where the Premium payable by a Policyholder in respect of an EIB in relation to an assurance year exceeds the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB is deemed by application of subsection 26AH(13) to have commenced at the beginning of the year in which the Premium was increased, rather than at the date of commencement of the period in respect of which the first Premium under the EIB was paid. 55. Where the Premium payable by a Policyholder in respect of an EIB in relation to each assurance year does not exceed the Premium payable under that EIB in the immediately preceding assurance year by more than 25%, the 10-year eligible period in respect of the EIB, for the purposes of the application of subsection 26AH(6), continues to run from the date of commencement of the period in respect of which the first Premium under the EIB was paid. Capital gain or capital loss from payments under the Executive Investment Bond disregarded 56. Under subsection 108-5(1) of the ITAA 1997, a CGT asset is any kind of property or a legal or equitable right that is not property. The contractual rights of a Policyholder and, as applicable, a Policyholder's nominated beneficiary or deceased estate under an EIB, are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. 57. Where Utmost makes a payment of a Surrender Value or part surrender benefit in satisfaction of a Policyholder's contractual rights under an EIB, their ownership of those rights is discharged or satisfied. Similarly, where Utmost makes a payment of a Death Benefit in satisfaction of a Policyholder's, a nominated beneficiary's or a Policyholder's deceased estate's contractual rights under an EIB, as applicable, their ownership of those rights is discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 (paragraph 104-25(1)(b) of the ITAA 1997). 58. The Policyholder, their nominated beneficiary or their deceased estate, as applicable, makes a capital gain from this CGT event if their capital proceeds from the ending of the ownership of their asset are more than the asset's cost base or, alternatively, a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997). 59. Section 118-300 of the ITAA 1997 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) of the ITAA 1997 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 Income tax: capital gains tax  is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression? ). 60. Table item 3 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to the original owner of the policy (other than the trustee of a complying superannuation entity). 61. As an entity to which the EIB is first issued, a Policyholder referred to in subparagraph 4(a) of this Ruling is regarded as an original owner of a policy of insurance on the life of an individual. Accordingly, that Policyholder is entitled under table item 3 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 62. Table item 4 of subsection 118-300(1) of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event happening in relation to a CGT asset that is an interest in rights under a policy of insurance on the life of an individual is disregarded where that CGT event happens to an entity that acquired the interest in the policy for no consideration. 63. On the assignment of ownership of an EIB for no consideration to a Policyholder referred to in subparagraph 4(b) of this Ruling, that Policyholder acquires an interest in the EIB for no consideration. A Policyholder referred to in subparagraph 4(b) of this Ruling is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment by Utmost of either a Surrender Value or part surrender benefit upon total or part surrender of the EIB, or (where the Policyholder is not a life assured) a Death Benefit. 64. On the death of a Policyholder who is the Relevant Life Assured, the Policyholder's nominated beneficiary or deceased estate, as applicable, acquires an interest in the EIB for no consideration. The beneficiary or the deceased estate, as applicable, is therefore entitled under table item 4 of subsection 118-300(1) of the ITAA 1997 to disregard any capital gain or capital loss they make under section 104-25 of the ITAA 1997 from the receipt of a payment of a Death Benefit by Utmost. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Related rulings: IT 2346 TD 94/82 TD 2007/4
Legislative references: ITAA 1936 6(1) ITAA 1936 26AH ITAA 1936 26AH(1) ITAA 1936 26AH(4) ITAA 1936 26AH(5) ITAA 1936 26AH(6) ITAA 1936 26AH(7)(a)(i) ITAA 1936 26AH(8) ITAA 1936 26AH(8)(b) ITAA 1936 26AH(9) ITAA 1936 26AH(11) ITAA 1936 26AH(12) ITAA 1936 26AH(13) ITAA 1936 95(2) ITAA 1936 160AAB ITAA 1936 Pt IVA ITAA 1997 Pt 3-1 ITAA 1997 104-25 ITAA 1997 104-25(1)(b) ITAA 1997 104-25(3) ITAA 1997 108-5(1) ITAA 1997 118-300 ITAA 1997 118-300(1) ITAA 1997 Div 775 ITAA 1997 995-1(1) Life Insurance Act 1995 9 Life Insurance Act 1995 9(1)(a) Life Insurance Act 1995 9(1)(g) SISA 1993