Edited version of private advice

Authorisation Number: 1051811048828

Date of advice: 11 March 2021

Ruling

Subject: Assessable income - beneficiary - foreign life insurance policy

Question

Are you required to pay tax on lump sums from your foreign life insurance policies in Australia?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your family expect to arrive in Australia in 20XX to take up residence in Australia.

You have foreign life insurance policies.

You are the original beneficial owner of all policies.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1936 Section 26AH

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 118-300

Reasons for decision

Under section 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) the assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia.

Under subsection 6-5(1) of the ITAA 1997 ordinary income is income according to ordinary concepts.

Section 6-10 of the ITAA 1997 states statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law.

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 ITAA 1997.

Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in assessable income certain bonuses received in respect of life insurance policies.

Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation states that:

Section 26AH provides that a taxpayer's assessable income shall include bonuses, and some other amounts in the nature of bonuses, received under a relevant life assurance policy ("an eligible policy") during a specified period ("the eligible period"). 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, while the date of commencement of risk in relation to an eligible policy is -

•         the date of commencement of the period to which the first or only premium paid under the policy relates; or

•         where the first or only premium does not relate to a particular period, the date of payment of that premium.

The eligible period in respect of an eligible policy is the first 10 years in the case of a policy with a date of commencement of risk after 7 December 1983 or the first 4 years where the date of commencement of risk is after 27 August 1982 and on or before 7 December 1983.

Paragraph 5 of the IT 2346 provides that section 26AH may apply to amounts received under any form of life assurance policy including those known as unbundled life assurance contracts and which may be categorised as either investment account or investment-linked policies. It explains further at paragraph 9 that in the case of unbundled policies, the concept of bonuses representing the profit or gain element passed on to the policyholder is maintained for the purposes of section 26AH.

Section 102-20 of the ITAA 1997 provides that a taxpayer makes a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset.

A life assurance policy is a CGT asset for the purposes of the CGT provisions. Under section 118-300 of the ITAA 1997 any capital gain or loss is disregard if the taxpayer is the original beneficial owner of the policy.

In your case, you will receive lump sums when your two life policies mature. You have held both policies for more than 10 years. Therefore, they are not assessable under section 26AH of the ITAA 1936.

You are the original beneficial owner of both policies and are entitled to disregard (and not include in your assessable income) any assessable gain or loss made from the termination of the policies.

Accordingly, you are not required to pay tax on lump sums from your foreign life policies.

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