1 Will the proceeds from the redemption of the foreign investment linked life assurance policy (Policy A) be non-assessable income in your Australian tax return?
1 Yes. Question 2 Will the proceeds from the redemption of the foreign life insurance policy (Policy B) after December 20XX be non-assessable income in your Australian tax return? Answer 2 Yes. This ruling applies for the following period: Year ending DD MM YY The scheme commenced on: DD MM YY
You hold two foreign life insurance policies. One is a Policy A which is an investment linked life assurance policy. The other is Policy B. Both policies were purchased while you were living and working in Country A from YY to YY. You were a tax resident of Country A at the time, as well as a temporary resident with a work permit and temporary residency card. Policy A is a policy from Country A. Policy B is from Country B. You were able to purchase this policy as you are a citizen and tax resident of Country B. You are not liable for tax in Country B however as you are not living there and have been out of the country for more than 180 days continuous. On DD MM YY you became a resident of Australia for tax purposes. You make pay monthly premiums to Policy A. You were paying $X USD per month, but from MM YY you reduced the payments to $X USD per month. This policy can be taken as one policy or ten identical ones. You opted to take ten identical ones. Yours is the life insured under this policy. Policy A has a loyalty bonus which is X% per year of the total plan after the tenth anniversary. The option date for Policy A is DD MM YY.
Policy B was purchased with a one initial contribution. No lives are assured under this policy, so it does not end on death. The policy has a X-year fixed term and the investment continues until the end of this period or until it is cashed in. No bonuses have been taken from either policy. Commencement date of Policy A is DD MM YY. Commencement date of Policy B is DD MM YY. You are planning to redeem both policies in the next few months, dependant on the tax implications.
Income Tax Assessment Act 1936 section 26AH Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 6-10 Income Tax Assessment Act 1997 section 15-75 Income Tax Assessment Act 1997 section 104-5 Life Insurance Act 1995 section 9
Taxation Ruling IT 2504 Income tax: deducibility of interest on borrowed funds - life assurance policies discusses life assurance policies, and states that bonuses received on a policy of life insurance are not income according to ordinary concepts and therefore are not assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income. However, section 15-75 of the ITAA 1997 provides that a taxpayer's assessable income includes any amount received as or by way of bonus on a life insurance policy, other than a reversionary bonus. In working out whether a bonus is taxable, it is important to ascertain whether the amount is paid during the course of the policy, or on surrender or maturity of the policy. Bonuses received on surrender or maturity of a life insurance policy may be included in assessable income under section 26AH of the Income Tax Assessment Act 1936
(ITAA 1936). The effect of section 26AH of the ITAA 1936 is that reversionary bonuses received within 10 years from the date of commencement of risk of a policy are either wholly or partially included in assessable income. Where, however, reversionary bonuses are received more than 10 years from the date of commencement of the policy, they do not fall within the operation of section 26AH and are not included in assessable income. Section 6 of the ITAA 1936 gives 'life assurance policy' the same meaning as 'life insurance policy' in the ITAA 1997.The definition of 'life insurance policy' in section 995-1 of the ITAA 1997 has the meaning given to the expression 'life policy' in section 9 of the Life Insurance Act 1995 (LIA 1995). Section 9 of the LIA 1995 defines 'life policy' and includes: (1) Subject to subsection (2), each of the following constitutes a life policy for the purposes of this Act: (a) a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;
(b) a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life; (c) a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life; (d) a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the term prescribed by the regulations for the purposes of this paragraph; (e) a continuous disability policy; (f) a contract (whether or not it is a contract of insurance) that constitutes an investment account contract; (g) a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract. Taxation Ruling IT 2346 Income Tax: Bonuses paid on certain life assurance policies - interpretation and operation of section 26AH of the ITAA 1936 discusses short-term life assurance policies. An eligible policy is defined to mean a policy of life assurance in relation to which the date of commencement of risk is after 27 August 1982.
The relevant amount under policies where the date of commencement is after 27 August 1982 is: • fully assessable if received during the first 8 years; or • two-third assessable if received during the first 9 years; or • not assessable under section 26AH of the ITAA 1936 if the policy has been held for a minimum of 10 years. Application to your circumstances The date of the commencement of risk for both policies (the commencement date of the policy) is a date more than 10 years prior. Where this date is after 27 August 1982 but more than 10 years prior to the receipt of a reversionary bonus arising from redemption or surrender of the policy, the amount received is non-assessable. In respect of Policy A, this commenced on DD MM YY. Although you pay monthly premiums in respect of this policy, the total amount paid in an assurance year has not exceeded by 25% the total paid in the immediately preceding assurance year, such that the eligible period reckoning date would be reset under the operation of section 26AH(13) of the ITAA 1936.
In respect of Policy B, while no life is assured under this policy, it is an investment linked policy and is deemed to be a 'life policy' under section of the LIA 1995.