Issue
Does the expression 'policy of insurance on the life of an individual' which is used in items 3 to 6 in the table in section 118-300 of the Income Tax Assessment Act 1997 (ITAA 1997), encompass a sinking fund policy?
Decision
No. The expression 'policy of insurance on the life of an individual' in items 3 to 6 in the table in section 118-300 of the ITAA 1997, only refers to life insurance policies where a payment of a sum of money is made upon the happening of an event that is contingent on the duration of human life.
Facts
The taxpayer is the beneficial owner of a sinking fund policy issued by a life insurance company.
A sinking fund policy comes within the meaning of 'life insurance policy' as defined in section 995-1 of the ITAA 1997.
Reasons for Decision
Section 118-300 of the ITAA 1997 exempts certain capital gains which relate to a person's rights under a life insurance policy. Items 3 to 6 in that table describe exemptions available in respect of a 'Policy of insurance on the life of an individual' . This expression is not defined in section 995-1 of the ITAA 1997, and must therefore take its commonly understood meaning.
The meaning of 'life insurance policy' has on a number of occasions been addressed by the courts - for example see National Mutual Life Association of Australia v. FCT (1959) 102 CLR 29; (1959) 11 ATD 523; (1959) 7 AITR 368, and more recently AMP Life Limited v. Commissioner of State Revenue (2003) 53 ATR 54; 2003 ATC 4526.
The courts have concluded that life policies exhibit the following features: • there must be a payment of a given sum of money, • upon the happening of an event, • that is contingent on the duration of human life, • in consideration of a smaller sum or sums that are paid on the policy by the insured.
As the terms 'life insurance policy' and 'policy of insurance on the life of an individual' address the same concepts, it is considered that the commonly understood meaning of 'policy of insurance on the life of an individual' would also be the commonly understood meaning of 'life insurance policy'.
However, as well as having been defined by the courts, the term 'life insurance policy' is defined in section 995-1 of the ITAA 1997 and takes the following meaning: [life insurance policy] has the meaning given to the expression life policy in the Life Insurance Act 1995 but includes: a) a contract made in the course of carrying on a business that is life insurance business because of a declaration in force under section 12A or 12B of that Act; and b) a sinking fund policy within the meaning of that Act.
The definition of 'sinking fund policy' is contained in the Schedule (Dictionary) of the Life Insurance Act 1995: "sinking fund policy" means a contract that has the following features: a) the company issuing the policy undertakes to pay money on one or more specified dates; b) neither the payment of that money not the payment of the premium is dependent on the death or survival of the person to whom the policy is issued or of any other person.
It can be seen that the meaning of 'life insurance policy' for the purposes of the ITAA 1997 can include policies such as sinking fund policies, where the payment of money is not contingent on an event involving the duration of human life. The definition taken from the Life Insurance Act 1995 can also cover certain friendly society products such as income bonds, education bonds, funeral bonds and scholarship plans. Although these therefore meet the definition in the ITAA 1997 of 'life insurance policies', payment under these policies is not triggered by an event dependent on the duration or termination of human life.
The extended definition of 'life insurance policy' in the ITAA 1997 only applies where the specific words 'life insurance policy' are used. The exemption which applies in section 118-300 only applies 'in the situations set out in th(e) table'. The table only uses the term 'policy of insurance on the life of an individual' and therefore, the exemption only applies to life insurance policies as commonly understood, and not to all policies encompassed in the extended statutory definition of 'life insurance policy'.
Section 118-300 was amended by the New Business Tax System (Miscellaneous) Act (No 2) 2000 by substituting in the table the expression 'policy of insurance on the life of an individual' for 'life insurance policy'. The Explanatory Memorandum (EM) to that Act makes the following comments about the reason for this amendment:
the amendments ensure that, to avoid any unintended consequences, the references to a life insurance policy in sections 118-300 and 152-20 are restricted to those policies that qualify as life insurance policies under the current law - that is, to policies of insurances that are taken out on the life of an individual.
It is evident from the words used in the EM, that there was an intention to limit the exemptions contained in section 118-300 of the ITAA 1997 to a narrower range of insurance policies than the policies which come within the defined term 'life insurance policy'.
As a payment made under a sinking fund policy is not dependent on the duration or termination of human life, the proceeds will not be exempted under section 118-300 of the ITAA 1997.