Assessability of a bonus from a foreign life insurance endowment policy

Is a bonus paid on the maturity of a resident taxpayer's foreign life insurance endowment policy, entered into in 1980 with a value not exceeding $50 000, assessable under Division 6 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

No. A bonus paid on the maturity of a resident taxpayer's foreign life insurance endowment policy, entered into in 1980 with a value not exceeding $50 000, is not assessable under Division 6 of the ITAA 1997.

The policy, taken out by the taxpayer in 1980, was a life insurance endowment policy issued in the United Kingdom (UK) and subject to the law of England. The policy offered a sum payable on the death of the life insured and was for a fixed period of 20 years.

The policy matured and, as a result, a once off bonus was declared and paid.

The taxpayer is a resident of Australia.

The value of the policy does not exceed $50 000.

Neither the taxpayer nor the taxpayer's associates have any other interest in Foreign Life Policies or Foreign Income Funds.

Division 6 of the ITAA 1997 deals with amounts which are included in the taxpayer's assessable income as they are either; • income according to ordinary concepts, that is ordinary income ( section 6-5 of the ITAA 1997); or • an amount which is included by a specific provision about assessable income, that is statutory income ( section 6-10 of the ITAA 1997).

Section 995-1 of the ITAA 1997 provides that a life insurance policy has the meaning given to the expression 'life policy' in the Life Insurance Act 1995 .

Section 9 of the Life Insurance Act defines a 'life policy' to include a contract of insurance that provides a payment of money on the death of a person. The taxpayer's policy will be considered to be a life insurance policy for income tax purposes.

Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) provides for the taxation of certain bonuses received under short term life insurance policies taken out after 27 August 1982, referred to as 'eligible policies'. As the policy existed before that date, it is not taxed under that provision. History note The date in the above paragraph has been changed from 27 August 1983 to 27 August 1982 to reflect the legislation.

Taxation Ruling IT 2504 provides the Commissioner's views on bonuses received from life insurance policies. It states at paragraph 2; 'Bonuses received on a policy of life assurance are not income according to ordinary concepts and therefore do not constitute assessable income under subsection 25(1) of the Act. However, paragraph 26(i) of the Act provides that the assessable income of a taxpayer shall include any amount received as or by way of bonus - other then a reversionary bonus on a policy of life assurance.'

A bonus is said to be reversionary when the entitlement to the bonus only accrues upon maturity of the policy and is not payable annually. The taxpayer's bonus was a reversionary bonus and is not taxed under either paragraph 26(i) of the ITAA 1936 or section 6-5 of the ITAA 1997 (the latter section replacing subsection 25(1) of the ITAA 1936 for the 1998 and later income years).

The capital gains tax provisions can operate to tax gains on certain life insurance policies. However subsection 104-10(5) of the ITAA 1997 provides that capital gains or capital losses will be disregarded if an asset was acquired before 20 September 1985. The taxpayer's life insurance policy was entered into in 1980 and any rights acquired under that policy were acquired before 20 September 1985. Therefore the bonus on the policy is not taxed under the capital gains tax provisions.

The Foreign Investment Fund (FIF) measures can apply to a taxpayer's interest in a Foreign Life Policy (FLP). Subsection 485(4) of the ITAA 1936 provides that the FLP regime applies where the following conditions exist; • the taxpayer had an interest or interests in a FLP at any time during the notional accounting period of the FLP that ends in a year of income; and • the year is later than the 1992/1993 year of income; and • the taxpayer was an Australian resident at any time in that year of income.

Subsection 483(3) of the ITAA 1936 provides that a person has an interest in a FLP if the person has the legal title to the FLP. The taxpayer, as policyholder had legal title to the policy. As the taxpayer had an interest in a FLP, and was a resident during that year the FIF measures may apply.

Four categories of policies are excluded from the operation of the FLP regime under section 482 of the ITAA 1936. The excluded policies are: • an Australian policy; • policies providing payment on death or permanent disability only; • policies issued before 1 July 1992 which cannot after that date be cancelled, surrendered or redeemed and for which the terms have not after that date been altered in a material way; • a contract of reinsurance between a resident insurer and a non resident insurer in relation to life assurance policies which provide only life cover.

None of these exemptions apply to the taxpayer's policy and accordingly the taxpayer has an interest in a FLP.

However, an exemption is available under subsection 515(1) of the ITAA 1936 when the value of a taxpayer's total interests in a FLP or other FIF interests, combined with the interests any of their associate's hold in FLPs or FIFs, does not exceed $50 000. The $50 000 limit applies to interests held by the taxpayer and the taxpayer's associates at the end of the notional accounting period of the FIF or FLP. History note The above paragraph was replaced on 30 April 2004. The original paragraph follows. However, an exemption is available under subsection 515(1) of the ITAA 1936 when a taxpayer's total interests in a FLP or other FIF interests do not exceed $50 000 in value. The $50 000 limit applies to interests held by the taxpayer and the taxpayer's associates at the end of the year of income.

Since the taxpayer and the taxpayer's associates total interests in FIFs and FLPs held at that time did not exceed $50 000 in value the interest is not subject to FIF taxation.

Therefore the bonus paid on the maturity of the taxpayer's foreign life insurance endowment policy, entered into in 1980 and with a value not exceeding $50 000, is not assessable income under Division 6 of the ITAA 1997 and the interest is not subject to the FIF measures. History note The phrase "and the interest is not subject to the FIF measures" has been added at the end of the above paragraph on 30 April 2004.