Valuing an interest in a foreign life policy: exemption for interest of less than $50,000

If an interest in a foreign life policy (FLP) is disposed of part way through the year, is the value of that interest the cost incurred in acquiring the interest for the purposes of section 515 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The value at the end of the year of the interest in the FLP for the purposes of section 515 of the ITAA 1936 is the cost incurred by the taxpayer in acquiring the interest in the FLP.

The taxpayer is a natural person and an Australian resident. The taxpayer took out the FLP before 1993. The policy was a FLP within the meaning of section 482 of the ITAA 1936 and the taxpayer's interest was an interest in the FLP within the meaning of subsection 483(3) of the ITAA 1936.

The FLP matured in July 2002 and the taxpayer received a one off payment of $80,000 on maturity. The taxpayer's contributions over the life of the FLP were $50,000.

The taxpayer had only one interest in the FLP and neither the taxpayer nor any of the taxpayer's associates have any interests in any other FLPs or in any Foreign Investment Funds (FIFs).

Section 515 of the ITAA 1936 provides an exemption that applies to exclude a taxpayer from attributing income that would otherwise be assessable under the FIF Rules contained in Part XI of the ITAA 1936. That exemption applies where the taxpayer is a natural person and the value of the taxpayer's (and any associates) interests in FIFs and FLPs is $50,000 or less.

Section 515 of the ITAA 1936 requires several conditions to be fulfilled before the exemption applies: (a) firstly, the taxpayer must be a natural person not acting in the capacity of a trustee, (b) secondly, the taxpayer must have an interest in a FIF or FLP at the end of a notional accounting period of the FIF or FLP.

Section 487 of the ITAA 1936 sets out what is a notional accounting period for a FLP. Where an interest in a FLP is disposed of, the notional accounting period is taken to end immediately after the disposal (see subsection 487(8)). Therefore, the taxpayer has an interest in the FLP at the end of the notional accounting period of that FLP and the second condition in section 515 of the ITAA 1936 is satisfied.

Paragraph 515(1)(b) of the ITAA 1936 then requires that the value of the all interests in FIFs and the value of all FLPs in which the taxpayer (or associates) had an interest at the end of the relevant notional accounting period must not, at the end of the year of income, exceed $50,000.

Subsection 515(2) of the ITAA 1936 then sets out what the value is at the end of the year of the relevant interests for the purposes of paragraph 515(1)(b). The value is the greater of: (a) the cost incurred by the person in acquiring the interest in the FIF or FLP, as the case may be, or (b) the market value of the interest in the FIF or of the FLP, as the case may be, at the end of the year of income.

Where the taxpayer has disposed of their interest in a FLP part way through an income year there is no market value of that interest at the end of the taxpayer's year of income. Therefore, the value for the purposes of paragraph 515(1)(b) of the ITAA 1936 is the cost incurred by the person in acquiring the interest in the FLP.