Issue
Is the reversionary bonus received on maturity of a foreign life policy (FLP) taken out before 27 August 1982 in respect of which income has been previously attributed to the taxpayer under Part XI of the Income Tax Assessment Act 1936 (ITAA 1936) assessable income?
Decision
No. The reversionary bonus received on maturity of a FLP taken out before 27 August 1982 in respect of which income has been previously attributed to the taxpayer under Part XI of the ITAA 1936 is not assessable income.
Facts
The taxpayer is a natural person and an Australian resident. The taxpayer took out the FLP before 27 August 1982. 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 $100,000 on maturity. The taxpayer's contributions over the life of the FLP were $80,000.
No other payments were made to the taxpayer from the FLP at any time during which the policy was held.
The taxpayer was assessed under section 529 of the ITAA 1936 in respect of their interest in the FLP in respect of previous income years.
Reasons for Decision
Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included: • 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).
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.
As the bonus will not be ordinary income, it will only be included in assessable income if it is statutory income.
Section 26AH of the ITAA 1936 includes in assessable income certain bonuses received under short term life insurance policies taken out after 27 August 1982, referred to as 'eligible policies'. As the policy commenced before that date, it is not taxed under that provision.
Paragraph 26(i) of the ITAA 1936 includes in assessable income bonuses received under a policy of life assurance other than reversionary bonuses. A bonus is a reversionary bonus when the entitlement to the bonus only accrues upon maturity of the policy and is not payable annually. As the taxpayer's bonus was a reversionary bonus, the bonus is not taxed under paragraph 26(i).
As the interest in the FLP was acquired prior to 20 September 1985, the capital gains tax provisions are not relevant. In any event section 118-300 of the ITAA 1997 may have applied to disregard any capital gain arising from the disposal.
As no amount of the payment is ordinary or statutory income, the payment is not included in assessable income under Division 6 of the ITAA 1997.
However, in the taxpayer's income year in which the FLP matured, the taxpayer is required to calculate the attributable income included in their assessable income under section 529 of the ITAA 1936 in respect of the FLP's notional accounting period that ended in that income year. The relevant notional accounting period ends immediately after the disposal of the interest in the FLP (see subsection 487(8) of the ITAA 1936). The amount included in assessable income under section 529 is separate and independent to the final amount received upon maturity.
Therefore, the amount attributed to the taxpayer under section 529 of the ITAA 1936 is included in assessable income. However, none of the amount actually received by the taxpayer upon maturity is included in assessable income.
The taxpayer may have paid foreign tax on the amount received from the FLP upon maturity. Because none of this payment is assessable income, no amount of foreign income tax offset will be allowed in respect of this foreign tax paid under section 770-10 of the ITAA 1997.