Edited version of private advice

Authorisation Number: 1051997610959

Date of advice: 18 July 2022

Ruling

Subject: Life insurance bonuses

Issue 1 - Taxation of the Trustee

Question

Will the Policy be a 'life insurance policy' within the meaning of subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Must the Trustee include, as an amount of assessable income in the calculation of the net income of the A Unit Trust for the purposes of subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936), the Net Cash Value (NCV) received on its Policy pursuant to section 15-75 of the ITAA 1997?

Answer

No.

Question 3

Must the Trustee include, as an amount of assessable income in the calculation of the net income of the A Unit Trust for the purposes of subsection 95(1) of the ITAA 1936, the whole or any part of the NCV received on its Policy if it is received after the 'eligible period' as defined in subsection 26AH(1) of the ITAA 1936?

Answer

No.

Question 4

Will increases in the value of assets which are recognised in the Segregated Accounts and allocated to an Insured's Account be included as assessable income in the calculation of the net income of the A Unit Trust for the purposes of subsection 95(1) of the ITAA 1936?

Answer

No.

Question 5

Can the Trustee disregard a capital gain it makes in respect of CGT event C2 under section 104-25 of the ITAA 1997 upon the total surrender or partial surrender of the Policy, pursuant to section 118-300 of the ITAA 1997?

Answer

Yes.

Issue 2 - Taxation of Unit Holders

Question 6

Will the unit holders in the A Unit Trust (Unit Holders) acquire their units in the A Unit Trust (Units) on the date on which the contract for the subscription of the Units will be entered into pursuant to item 3 of the table in section 109-10 of the ITAA 1997?

Answer

Yes.

Question 7

Will the first element of the cost base and reduced cost base of each Unit be the amount subscribed for those Units pursuant to subsections 110-25(2) and 110-55(2) of the ITAA 1997?

Answer

Yes.

Question 8

Will the cost base or reduced cost base of the Units be reduced pursuant to subsection 104-70(6) of the ITAA 1997 if a Unit Holder receives from the Trustee the whole or any part of a distribution on those Units which is referrable to the NCV received by the Trustee?

Answer

No.

Question 9

Will a non-resident Unit Holder be subject to capital gains tax under Part 3-1 of the ITAA 1997 upon disposal of their Unit?

Answer

No.

Issue 3 - Part IVA

Question 10

Will the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply in respect of either:

(a)   the acquisition of a Policy by the Trustee; or

(b)   the acquisition of Units by a Unit Holder?

Answer

No.

This ruling applies for the following periods:

Years ending 30 June 2023 to 30 June 2027

Relevant facts and circumstances

Company A is a life insurance company that is incorporated overseas. The Policy is a life insurance policy offered by Company A to policyholders. Each Policy covers the life of a number of individuals who are non-residents participating in a pre-existing pension plan (each an Insured Person or an Insured).

The A Unit Trust was established in 20XX. The trustee of the A Unit Trust was incorporated in Australia.

Prospective unit holders in the A Unit Trust will apply to subscribe for Units by completion of an application form and payment. Once this application is accepted by the Trustee, this constitutes a contract for the issue of the Units to that applicant who will become a Unit Holder once they are entered onto the register. Unit Holders will pay a specified subscription price to acquire each Unit and will not be required to pay any further amounts or give any other property. The Units will be issued to a wide variety of investors, including individuals and complying superannuation funds.

The Trustee will acquire one or more of the Policy issued by Company A and will therefore be the policyholder and owner of the Policy(s). The Policy will be the main asset of the A Unit Trust which does not intend to acquire land or an interest in land.

The Policy does not give the Trustee any ownership of the assets of Company A or a membership interest in Company A. Investing in the A Unit Trust enables investors to access (indirectly through the holding of the Policy by the Trustee) a diverse range of investment options through Insurance Dedicated Funds (IDFs) which are the investment vehicles that accept investments from segregated accounts of insurance companies.

Policy Premium

A policyholder can elect to make a single premium payment in respect of each Insured Person. The premium in respect of each Insured Person will be allocated by Company A to an account maintained in respect of that person (the Insured's Account). The single premium will be due to be paid to Company A on the date coverage of the life of the Insured Person begins.

Alternatively, the policyholder can elect to make a series of premium payments in respect of the Insured's Accounts which are established at the time the Policy is issued.

The Trustee will use the proceeds from the issue of the Units in the A Unit Trust to Unit Holders to pay the premium to Company A for the issue of the Policy.

Segregated Accounts

Company A will establish a number of 'Segregated Accounts', which is an account, separate and distinct from any other asset or liability of Company A, or other Segregated Accounts.

At the time the Insured's Accounts are established, the policyholder will select one or more Segregated Accounts into which the premiums for the Insured's Accounts are to be allocated. The allocation between Segregated Accounts may be altered at any time by the written instruction of the policyholder.

Each Segregated Account will represent a particular asset class, including IDFs managed by certain specialised asset managers.

There is no right or entitlement in the Trustee to any asset held by Company A which might be applied to discharge its liabilities on the Policy. Accordingly, any amounts which are recognised by Company A as an increase to the Segregated Accounts of an Insured's Account are not amounts to which the Trustee is entitled at the time of recognition. There is no legal right in the Trustee to receive all or any part of those allocations.

The Cash Value of an Insured's Account is the total amounts allocated to the Segregated Account(s). The Cash Value will increase or decrease over time by reference to the increase or decrease in the underlying investments referable to the Segregated Accounts which have been allocated to the Insured's Account.

From the Cash Value of each Insured's Account will be deducted certain periodic expenses incurred by Company A. The NCV of an Insured's Account is the Cash Value of the Insured's Account less any debts applicable to the Insured's Account.

Maturity of Policy

An Insured's Account will terminate on the Maturity Date and the NCV will be paid to the policyholder. The Maturity Date is defined as the Insured's Account Anniversary (IAA) following the Insured's 121st birthday. The first IAA is the 13th processing date following the date the coverage of an Insured Account began. Subsequent IAA occur on the 12th processing date following a previous IAA.

Death Benefit

The Death Benefit is the amount payable on the death of the Insured. The Death Benefit comprises of two components:

•         the Cash Value of the Insured's Account which is held in the Segregated Accounts; and

•         the 'Net Amount at Risk' (NAAR) which is the subject of a reinsurance arrangement entered into by Company A.

Company A will pay the Net Death Benefit to the Beneficiaries upon the death of an Insured Person. The Net Death Benefit will be paid to:

•         the Cash Value Beneficiary, being the policyholder; and

•         the NAAR Beneficiary, being the pension plan of which the Insured Person was a member.

Surrender of Insured's Account

The Policy provides for the partial surrender and total surrender of an Insured's Account by the policyholder where eligibility conditions are satisfied.

If total surrender is made, the Insured's Account will be surrendered for a payment equal to the Net Cash Surrender Value (NCSV) of the Insured's Account (less any surrender charges). The NCSV of an Insured's Account is the Cash Surrender Value (CSV) of an Insured's Account less any debt applicable to the Insured's Account. The CSV of an Insured's Account is the Cash Value of an Insured's Account less any surrender charges.

The NCSV will be paid to the policyholder. Upon the distribution of the NCSV to the policyholder, all of Company A's obligations with respect to the Insured's Account are terminated.

Payment of the NCV

Therefore, the NCV will be paid under the Policy only on the occurrence of any of the following events (each a NCV payment event):

•         maturity of the Policy;

•         partial surrender or total surrender of the Policy; and

•         death of an Insured.

In due course, the NCV received by the Trustee on the occurrence of each NCV payment event will be distributed to the Unit Holders. Other than the NCV, no other payments will be made to the policyholder in respect of the Policy during the life of the Policy. No annual bonuses are paid to policyholders.

Assumptions

For the purposes of Question 9 of this ruling:

(a)  Just before the disposal of any Units by a non-resident Unit Holder, the A Unit Trust will not own assets that are taxable Australian real property (TARP) of such an amount so as to cause the Units to satisfy the principal asset test (PAT) under subsection 855-30(2) of the ITAA 1997.

(b)  No non-resident Unit Holder will use the Units in carrying on a business through a permanent establishment in Australia so that the Units will not be taxable Australian property (TAP) under category 3 of the table in section 855-15 of the ITAA 1997.

(c)   The choice under subsection 104-165(3) of the ITAA 1997 will not be relevant to a non-resident Unit Holder, or, if relevant, will not be exercised, so that the Units will not be TAP under category 5 of the table in section 855-15 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-75

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 paragraph 104-25(1)(b)

Income Tax Assessment Act 1997 subsection 104-25(3)

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 paragraph 104-70(1)(b)

Income Tax Assessment Act 1997 subsection 104-70(6)

Income Tax Assessment Act 1997 paragraph 104-71(1)(db)

Income Tax Assessment Act 1997 subsection 104-160(1)

Income Tax Assessment Act 1997 subsection 104-165(3)

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 section 109-10

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 subsection 110-55(2)

Income Tax Assessment Act 1997 section 118-300

Income Tax Assessment Act 1997 subsection 118-300(1)

Income Tax Assessment Act 1997 subsection 118-300(1A)

Income Tax Assessment Act 1997 subsection 118-300(2)

Income Tax Assessment Act 1997 Division 855

Income Tax Assessment Act 1997 section 855-10

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 855-20

Income Tax Assessment Act 1997 section 855-25

Income Tax Assessment Act 1997 section 855-30

Income Tax Assessment Act 1997 subsection 855-30(2)

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 26AH

Income Tax Assessment Act 1936 subsection 26AH(1)

Income Tax Assessment Act 1936 subsection 26AH(6)

Income Tax Assessment Act 1936 subsection 26AH(13)

Income Tax Assessment Act 1936 subsection 95(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177F

Life Insurance Act 1995 subsection 9(1)

Life Insurance Act 1995 paragraph 9(1)(a)

Life Insurance Act 1995 paragraph 9(1)(g)

Life Insurance Act 1995 subsection 14(4)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise specified.

Issue 1 - Taxation of the Trustee

Question 1

Summary

The Policy is a 'life policy' under the Life Insurance Act 1995 (LIA 1995) and is therefore a 'life insurance policy' under subsection 995-1(1).

Detailed reasoning

'Life insurance policy' is defined in subsection 995-1(1) to have the meaning given to the expression 'life policy' in the LIA 1995. Subsection 9(1) of the LIA 1995 defines a 'life policy' to include:

(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;

...

(g)    a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract.

Contract of insurance - paragraph 9(1)(a)

The definition of a 'life policy' in paragraph 9(1)(a) of the LIA 1995 is similar to the common law meaning of 'life insurance policy' which is mentioned in paragraph 18 of Taxation Determination TD 2007/4 Income tax: capital gains tax: is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression? (TD 2007/4) as a policy:

...where one party agrees to pay a given sum upon the happening of a particular event (contingent upon the duration of human life) in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another.

The Policy is a contract of insurance that provides a death benefit upon the death of a person. Under the Policy, on the death of an Insured, the Net Death Benefit will be paid to the Cash Value Beneficiary (Trustee) and NAAR Beneficiary (the pension plan of which the Insured is a member). Therefore, the Policy is a life insurance policy under the common law meaning and also a 'life policy' under paragraph 9(1)(a) of the LIA 1995.

Investment-linked contract - paragraph 9(1)(g)

Subsection 14(4) of the LIA 1995 defines an 'investment-linked contract' as a contract:

(a)    the principal object of which is the provision of benefits calculated by reference to units the value of which is related to the market value of a specified class or group of assets of the party by whom the benefits are to be provided; and

(b)    that provides for benefits to be paid:

                                          i.    on death; or

                                         ii.    on a specified date or specified dates or on death before the specified date, or the last of the specified dates, as the case may be.

Taxation Ruling IT 2346 Income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation (IT 2346) describes an 'investment-linked policy' as follows:

A contract providing a death benefit, and an investment account the value of which is directly linked to the performance of a specific investment portfolio. The value of the policyholder's interest will rise and fall with the movements in the value of the portfolio.

Under the Policy, the Trustee as policyholder selects one or more Segregated Accounts into which the premiums for the Insured Account are to be allocated. Each Segregated Account represents a particular asset class, including IDFs managed by specialised asset managers. The value of benefits provided under the Policy are based on the underlying investments referrable to the Segregated Accounts. Therefore, the Policy is an investment-linked contract and also a life policy under paragraph 9(1)(g) of the LIA 1995.

In summary, the Policy is a life insurance policy for the purposes of subsection 995-1(1) because it is a life policy under both paragraphs 9(1)(a) and 9(1)(g) of the LIA 1995.

Question 2

Summary

Section 15-75 only assesses amounts received as or by way of a bonus on a life insurance policy, other than a reversionary bonus. Under the Policy, the NCV received by the Trustee will be a reversionary bonus which is not assessable under section 15-75.

Detailed reasoning

The NCV is received by the Trustee on the occurrence of any NCV payment event comprising:

•           the maturity of the Policy;

•           partial or total surrender of the Policy; and

•           death of the Insured.

On the death of the Insured, the 2 components that comprise the Death Benefit will be paid to the Trustee (who receives the NCV) and the pension plan of which the Insured was a member (who receives the NAAR).

Section 15-75

Section 15-75 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'.

The term 'bonus' is not defined in either the ITAA 1936 or ITAA 1997, but is explained at paragraph 8 of IT 2346 in the context of 'more traditional policies' as a 'guaranteed addition to the sum insured which is payable when the sum insured is payable' and represents both 'a form of participation by the policyholder in the issuing company's profits' and 'a share in the surpluses derived by the issuing company during the period the policy is in force'.

The NCV that is received by the Trustee is considered to have the characteristics that are consistent with the description of a bonus in IT 2346. These characteristics include relating and being linked to a life insurance policy, being additional to the sum insured that is payable upon the death of the Insured, and providing the Trustee with participation in Company A's profits, as derived from the Segregated Accounts linked to the Policy (but held by Company A).

'Reversionary bonus' is also an undefined term under the ITAA 1936 and ITAA 1997. However, it is understood that a reversionary bonus is a bonus which is paid on the maturity, forfeiture or surrender of a policy.

Reversionary bonuses on life insurance policies are excluded from the operation of section 15-75. According to the note to section 15-75, reversionary bonuses are covered by section 6-5 if they are ordinary income and, if not, by section 26AH of the ITAA 1936.

Under the Policy, no annual bonuses are paid to policyholders. Instead, bonuses are only paid when the NCV is paid to the Trustee on the maturity of the Policy, partial surrender or total surrender of the Policy or death of the Insured. Therefore, all bonuses paid under the Policy will be reversionary bonuses and section 15-75 will not apply.

Question 3

Summary

Any whole or part of the NCV that is received by the Trustee on the Policy after the 'eligible period' as defined in subsection 26AH(1) of the ITAA 1936 is not assessable to the Trustee as a bonus under section 26AH of the ITAA 1936 or any other statutory provision. The NCV received by the Trustee will also be a receipt of proceeds from a life insurance policy which is not ordinary income, is exempt from capital gains under subsection 118-300(1) and not otherwise assessable under any other statutory provision.

Detailed reasoning

Receipt of insurance proceeds not assessable as ordinary income or under Part 3-1

As explained in ATO ID 2003/1189 Income Tax: CGT: buy - sell (business succession) agreement - life insurance proceeds - income or capital?, proceeds of life insurance policies payable on the death of the insured person:

•           are not ordinary income under section 6-5 since they are capital in nature: see Marac Life Assurance Ltd v. Commissioner of Taxation [1986] 1 NZLR 694 (Marac Life Assurance). The decision in Marac Life Assurance was applied by the Federal Court of Australia in NM Superannuation Pty. Ltd. v. Young & Anor (1993) 41 FCR 182; (1993) 7 ANZ Insurance Cases 61-163; and

•           is regarded as a capital receipt since the payment is to replace the capital asset (i.e. human life) and can be statutory income if included in assessable income by another provision such as the CGT provisions.

Section 118-300 disregards capital gains and losses made from certain CGT events happening in relation to an entity's interest in a 'life insurance policy'. Specifically, item 3 of the table in subsection 118-300(1) provides that a capital gain or capital loss made from certain CGT events (listed under subsection 118-300(2)) happening in relation to 'a policy of insurance on the life of an individual' is disregarded where one of the specified CGT events happens to the original owner of the policy (other than the trustee of a complying superannuation entity).

The expression 'policy of insurance on the life of an individual' in section 118-300 is not defined in the ITAA 1997. According to TD 2007/4, the meaning to be given to the expression includes, but is not limited to, life insurance policies within the common law meaning of that term. As previously stated (at Question 1 of this ruling), the Policy is a life insurance policy under the common law meaning and therefore is a 'policy of insurance on the life of an individual'.

The Trustee will be a policyholder and also the original owner of the Policy since it will purchase the Policy from Company A. Therefore, the exemption in subsection 118-300(1) can apply to a payment to the Trustee in respect of its Policy if it gives rise to one of the CGT events listed in subsection 118-300(2) which includes CGT events A1 and C2.

Under subsection 108-5(1), a 'CGT asset' is any kind of property or a legal or equitable right that is not property. Under the Policy, the contractual rights of the policyholder include the right to receive payment of the NCV on the occurrence of any NCV payment event - that is the maturity, partial or total surrender of the Policy or death of an Insured. These are legally enforceable rights and therefore a CGT asset.

When the Trustee receives a payment on the occurrence of a NCV payment event, CGT event C2 will happen since its ownership of those contractual rights will be discharged or satisfied. A policyholder would usually make a capital gain from this CGT event if their capital proceeds from the ending of their contractual rights is more than the asset's cost base, or alternatively, a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). However, since CGT event C2 is one of the specific CGT events listed in subsection 118-300(2), any capital gain or loss will be exempt if CGT event C2 happens in relation to a life insurance policy held by an original owner. Therefore, the whole of the NCV will be exempt from CGT under subsection 118-300(1), regardless of when the NCV is paid.

Taxation of bonuses under section 26AH

Bonuses received on life insurance policies, like proceeds of life insurance policies, are not generally income according to ordinary concepts and are addressed by specific statutory provisions.

As discussed (at Question 2 of this ruling), reversionary bonuses are not assessable under section 15-75 and are covered by section 26AH of the ITAA 1936.

Section 26AH of the ITAA 1936 includes in the assessable income of the recipient bonuses and other amounts received in respect of certain short-term life assurance policies.

'Eligible policy'

Section 26AH of the ITAA 1936 applies to an 'eligible policy' which is defined in subsection 26AH(1) of the ITAA 1936 to mean a 'life assurance policy' in relation to which the 'date of commencement of risk' is after 27 August 1982, other than a 'funeral policy' (as defined in the ITAA 1997) issued on or after 1 January 2003.

'Life assurance policy' is defined in subsection 6(1) of the ITAA 1936 to have the same meaning given to 'life insurance policy' in the ITAA 1997. As the Policy is a 'life insurance policy' it is therefore also a 'life assurance policy' for the purposes of section 26AH of the ITAA 1936.

The Policy is not a 'funeral policy' as defined under section 995-1, which is a life insurance policy issued by a friendly society for the sole purpose of providing benefits to pay for the funeral of the insured person.

The 'date of commencement of risk' is defined in subsection 26AH(1) of the ITAA 1936 and means the date of commencement of the period in respect of which the first or only premium paid under the policy was paid or, if the first or only premium was not paid in respect of a period, the date on which that premium was paid. The date of commencement of risk of the Policy is after 27 August 1982.

Therefore, the Policy is an 'eligible policy' for the purposes of section 26AH of the ITAA 1936.

Eligible period

The 'eligible period' in relation to an 'eligible policy' is defined under subsection 26AH(1) of the ITAA 1936 as the period of ten years commencing on the date of commencement of risk of the policy.

If the Trustee, as policyholder, receives a reversionary bonus within the 'eligible period', it will include in its assessable income in the year of receipt of that bonus a percentage of the amount received (known as the relevant amount) in accordance with subsection 26AH(6) of the ITAA 1936 being:

•         the amount equal to the relevant amount if it is received during the first 8 years of the eligible period;

•         two-thirds of the relevant amount if it is received during the ninth year of the eligible period; or

•         one-third of the relevant amount if it is received during the tenth year of the eligible period.

If the Trustee receives the reversionary bonus after the eligible period, no part of the reversionary bonus is assessable under section 26AH of the ITAA 1936 or any other statutory provision.

Therefore, the Trustee is not required to include any amount in the assessable income of the A Unit Trust in respect of any whole or any part of the NCV that is received on their Policy, if it is received after the eligible period.

This is on the basis that any such payment will be:

•           proceeds from a life insurance policy which is not ordinary income, is exempt from capital gains under subsection 118-300(1) and is not otherwise assessable under any other statutory provision; and

•           a reversionary bonus which is not assessable under section 26AH of the ITAA 1936 or any other statutory provision.

Increase premium year

However, where the premium payable by a policyholder in relation to an assurance year exceeds the premium payable in the immediately preceding assurance year by more than 25%, the 10 year eligible period in respect of the policy is deemed by application of subsection 26AH(13) of the ITAA 1936 to have commenced at the beginning of the year in which the premium was increased, rather than at the date of commencement of risk in respect of the eligible policy.

Where the premium payable by the policyholder in relation to each assurance year does not exceed the premium payable in the immediately preceding assurance year by more than 25%, the 10 year eligible period in respect of the policy, for the purposes of the application of subsection 26AH(6), continues to run from the date of commencement of risk in respect of the eligible policy.

Question 4

Summary

Since there is no legal right in the Trustee to any of the assets in the Segregated Accounts, any accretions to such assets are not included in the assessable income of the Trustee and therefore does not form part of the net income of the A Unit Trust under subsection 95(1) of the ITAA 1936.

Detailed reasoning

There is no right or entitlement in the Trustee to any assets held by Company A. Any amounts which are recognised by Company as an increase to the Segregated Accounts of an Insured's Account are not amounts to which the Trustee is entitled to at the time of recognition. There is no legal right in the Trustee to receive all or any part of those allocations.

Any increase in the value of assets which are recognised as an increase in the Segregated Accounts of an Insured's Account are bonuses that merely accrue so as to increase the amount ultimately payable to the policyholder.

Section 26AH of the ITAA 1936 only applies to amounts actually received as or by way of a bonus. Paragraph 7 of IT 2346 makes it clear that the mere crediting of a bonus to an account is not taken to be the receipt of a bonus.

There is no legal right in the Trustee to receive any part of those allocations until a NCV payment event occurs whereupon a payment will be made from those accounts.

Therefore, any increases in the values of assets recognised in the Segregated Accounts are not bonuses received by the policyholder and are not subject to taxation under subsection 26AH(6) of the ITAA 1936 or any other provision of the ITAA 1936 and ITAA 1997.

Question 5

Summary

While the partial or total surrender of the Policy gives rise to CGT event C2 for the Trustee, any capital gain or capital loss is exempt under subsection 118-300(1).

Detailed reasoning

Under the Policy, the contractual rights of a policyholder includes the right to receive payment (i.e. the NCV) on the maturity, partial or total surrender of the Policy or death of the Insured. These are legally enforceable rights and therefore a CGT asset.

Therefore, the receipt of a payment as a result of the partial or total surrender of the Policy will give rise to CGT event C2 under paragraph 104-25(1)(b) for the Trustee since its ownership of those contractual rights will be discharged or satisfied.

As discussed in Question 3 of this ruling, item 3 of the table in subsection 118-300(1) exempts a capital gain or capital loss from arising from CGT event C2 where that occurs in relation to a 'policy of insurance on the life of an individual' and the policyholder is the original owner of the policy (other than the trustee of a complying superannuation entity).

As discussed, the Trustee is the original owner of the Policy which is also a policy of insurance on the life of an individual. Therefore, where the Trustee receives a payment on the partial or total surrender of the Policy, any capital gain or capital loss resulting from CGT event C2 will be exempt under subsection 118-300(1).

Issue 2 - Taxation of Unit Holders

Question 6

Summary

For the purposes of working out their capital gain or capital loss in respect of the Units, the Unit Holders will acquire their Units when a contract is entered into for the acquisition of the Units under section 109-10. This occurs upon the acceptance by the Trustee of the offer of the Unit Holders to subscribe for Units.

Detailed reasoning

Section 109-10 sets out the time at which you acquire a CGT asset otherwise than as a result of a CGT event happening. Item 3 of the table in section 109-10 is relevant and provides that where a trustee of a unit trust issues units in the trust, the units are acquired by the unit holders when the contract is entered into or, if none, when units are issued.

Before the Units are issued, a prospective Unit Holder must apply to subscribe for the Units. Upon acceptance by the Trustee this will constitute a contract for the acquisition of the Units.

Therefore, the Unit Holders will acquire their Units on the date the Trustee accepts their offer to subscribe for the Units which is when the contract is entered into to acquire the Units.

Question 7

Summary

The first element of the cost base and reduced cost base for each Unit pursuant to subsections 110-25(2) and 110-55(2) respectively is the amount paid to subscribe for those Units.

Detailed reasoning

Under subsection 110-25(2) the first element of the cost base of a CGT asset is the money paid to acquire the asset plus the market value of any property given to acquire the asset.

Under subsection 110-55(2), the first element of the reduced cost base of each asset is the same as the cost base.

Therefore, the first element of the cost base and reduced cost base for each Unit is the money paid by a Unit Holder to acquire a Unit plus the market value of any property given to acquire a Unit.

Under the present scheme, a Unit Holder will pay an amount to subscribe for Units and will not be required to pay any further amounts or give any other property other than this amount.

Therefore, the first element of the cost base and reduced cost base for each Unit is the amount paid to subscribe and acquire each Unit.

Summary

The first element of the cost base and reduced cost base for each Unit pursuant to subsections 110-25(2) and 110-55(2) respectively is the amount paid to subscribe for those Units.

Detailed reasoning

Under subsection 110-25(2) the first element of the cost base of a CGT asset is the money paid to acquire the asset plus the market value of any property given to acquire the asset.

Under subsection 110-55(2), the first element of the reduced cost base of each asset is the same as the cost base.

Therefore, the first element of the cost base and reduced cost base for each Unit is the money paid by a Unit Holder to acquire a Unit plus the market value of any property given to acquire a Unit.

Under the present scheme, a Unit Holder will pay an amount to subscribe for Units and will not be required to pay any further amounts or give any other property other than this amount.

Therefore, the first element of the cost base and reduced cost base for each Unit is the amount paid to subscribe and acquire each Unit.

Question 8

Summary

The cost base or reduced cost base of the Units is not required to be reduced under subsection 104-70(6) if the Unit Holder receives a payment from the Trustee that is in whole or in part attributable to the NCV received by the Trustee. This is on the basis that such a payment does not constitute a 'non-assessable part' under paragraph 104-71(1)(db) since it is a payment to which subsection 118-300(1A) applies.

Detailed reasoning

Under section 104-70, CGT event E4 happens when a payment is made by a trustee of a trust to a taxpayer in respect of the taxpayer's unit or interest in the trust and some or all of that payment (the 'non-assessable part') is not included in the assessable income of the taxpayer.

CGT event E4 may apply to any distribution by the Trustee to the Unit Holder that is attributable in whole or in part to the NCV received by the Trustee. This is on the basis that the NCV is non-assessable income of the Trustee which when distributed results in the payment to the Unit Holders of an amount that is not included in their assessable income.

As previously discussed, the NCV is non-assessable income of the Trustee on the basis that it represents:

a.    proceeds from a life insurance policy which is not assessable as ordinary income, is exempt from capital gains under subsection 118-300(1) and is not otherwise assessable under any other statutory provision; and

b.    a reversionary bonus which is not assessable as ordinary income, or under section 26AH of the ITAA 1936 if it is received after the eligible period, or under any other statutory provision.

If CGT event E4 applies and the sum of the non-assessable part is greater than the cost base of each Unit, a capital gain is made. If a capital gain is made, the cost base and reduced cost base of each Unit is reduced to nil and the capital gain is the amount equal to the excess of the non-assessable part over the cost base or reduced cost base. If the sum of the non-assessable part is not greater than the cost base of each Unit, the cost base and reduced cost base is reduced by that sum.

However, in this instance, certain provisions apply to prevent CGT event E4 from happening which is explained further below.

Non-assessable part

One of the conditions to CGT event E4 happening is that under paragraph 104-70(1)(b) there must be a non-assessable part.

Paragraph 104-71(1)(db) provides that a payment to which subsection 118-300(1A) applies is disregarded in working out the non-assessable part for the purpose of section 104-70.

Subsection 118-300(1A)

Subsection 118-300(1A) applies to disregard a capital gain or capital loss from a CGT event happening when:

a.    a beneficiary of a trust receives a CGT asset (such as a payment) from the trustee of the trust; and

b.    the CGT asset is attributable to another CGT event and CGT asset to which item 3 of the table in subsection 118-300(1) applies for the trustee.

As discussed (at Questions 3 and 5 of this ruling), item 3 of the table in subsection 118-300(1) applies to disregard any capital gain or capital loss the Trustee makes in respect of any payment received upon the happening of CGT event C2 on the maturity, partial surrender or total surrender of the Policy or death of an Insured. This is on the basis the Trustee is owner of the Policy and is not the trustee of a complying superannuation entity.

Accordingly, when a Unit Holder receives a distribution from the Trustee that is in whole or in part attributed to the NCV received by the Trustee under the Policy, that payment is a payment to which subsection 118-300(1A) applies. As a result, the payment that is in whole or in part attributed to the NCV is disregarded as a non-assessable part pursuant to paragraph 104-71(1)(db) and CGT event E4 does not happen. Accordingly, there will be no reduction required to the cost base or reduced cost base of the Units as a consequence of the Unit Holder receiving such a distribution from the Trustee.

Result the same if Unit Holder is the trustee of a complying superannuation fund

The same outcome applies where the Unit Holder is the trustee of a complying superannuation fund.

Although the CGT exemption applying to life insurance policies under item 3 of the table in subsection 118-300(1) does not apply where the original owner of a policy is the trustee of a complying superannuation fund, this exception is not applicable here since the owner of the Policy is the Trustee which is the trustee of a unit trust, not a complying superannuation fund.

Result is not dependent on the holding period of the Units by the Unit Holder

This outcome is also not dependent on the period of time for which the Unit Holder held their Units. Relevantly, there is no condition in subsection 118-300(1A) that requires a Unit Holder to hold their Units for a certain period in order for the exemption under that subsection to apply to the payment.

Question 9

Summary

On the basis of the relevant assumptions, any capital gain on the disposal of Units by a non-resident Unit Holder will be disregarded under Division 855 since the Units are not TAP.

Detailed reasoning

Division 855

Under section 855-10, any capital gain or capital loss from a CGT event is disregarded if you are a non-resident just before the CGT event happens and the CGT asset is not TAP.

Under subsection 108-5(1), a 'CGT asset' is any kind of property or a legal or equitable right that is not property. The Units are CGT assets.

There are five categories of CGT assets that are TAP as set out in the table in section 855-15.

Taxable Australian real property - category 1

Item 1 of the table in section 855-15 is TARP as defined in section 855-20. TARP is real property situated in Australia or a mining, quarrying or prospecting right if the minerals, petroleum or quarry materials are situated in Australia. Therefore, the Units in A Unit Trust are not TARP and are not TAP under category 1.

Indirect Australian real property interest - category 2

Item 2 of the table in section 855-15 deals with CGT assets that are an indirect Australian real property interest (IARPI) as defined in section 855-25. A membership interest held by an entity in another entity is an IARPI at a particular time if the interest passes the non-portfolio interest test (NPIT) and the PAT at that particular time.

Each Unit in the A Unit Trust is a membership interest in the A Unit Trust and will be an IARPI and therefore TAP if it satisfies both the NPIT and PAT at a particular time.

Under section 855-30, a unit holder's interest in a unit trust satisfies the PAT if the unit trust's underlying value is principally derived from Australian real property which is when the market values of the unit trust's assets that are TARP exceeds the sum of the market values of its assets that are not TARP.

As it is assumed for the purposes of this ruling that just before the disposal of any Units by a non-resident Unit Holder, the A Unit Trust will not own assets that are TARP of such an amount so as to cause the Units to satisfy the PAT, each Unit will not be an IARPI, regardless of whether the Units will satisfy the NPIT which does not need to be considered. Consequently, the Units will not be TAP under category 2.

A CGT asset used in carrying on a business through a permanent establishment - category 3

Item 3 of the table in section 855-15 covers CGT assets that are used by a non-resident at any time in carrying on a business through a permanent establishment in Australia. For the purposes of this ruling, an assumption is made that the circumstances specified in item 3 will not apply to any non-resident Unit Holder and therefore the Units will not be TAP under category 3.

An option or right to acquire a CGT asset - category 4

Item 4 of the table in section 855-15 deals with an option or right to acquire a CGT asset that is covered by categories 1 (TAP), 2 (IARPI) or 3 (a CGT asset used to carry on a business through a permanent establishment). The Units do not give the Unit Holder a right or option to acquire any CGT assets under category 1, 2 or 3. Therefore the Units will not be TAP under category 4.

A CGT asset that is covered by subsection 104-165(3) - category 5

Item 5 of the table in section 855-15 deals with CGT assets that are covered by subsection 104-165(3). CGT event I1 happens under subsection 104-160(1) when an individual or a company stops being an Australian resident. Usually when CGT event I1 happens, a taxpayer needs to work out if they have made a capital gain or capital loss for each CGT asset that they owned just before they stop being an Australian resident. Subsection 104-165(3) provides an option for individuals to choose to disregard the making of a capital gain or a capital loss from all CGT assets covered by CGT event I1. If this option is chosen, each of those CGT assets is taken to be TAP until the earlier of a CGT event happening in relation to the asset or the individual again becoming an Australian resident.

For the purposes of this ruling it is assumed that the choice under subsection 104-165(3) will not be relevant to a non-resident Unit Holder or, if relevant, will not be exercised such that the Units will not be TAP under category 5.

Conclusion

On the basis of the relevant assumptions, the Units are not TAP under any category under section 855-15. Therefore, any capital gain or capital loss arising from the disposal of the Units by a non-resident Unit Holder will be disregarded under section 855-10.

Issue 3 - Part IVA

Question 10

Summary

Part IVA of the ITAA 1936 will not apply to a scheme that includes the acquisition of a Policy by the Trustee or the acquisition of Units by a Unit Holder, as described in this ruling.

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner power to cancel a 'tax benefit' that has been obtained, or would be obtained, but for section 177F of the ITAA 1936, by a taxpayer in connection with a scheme to which Part IVA applies. Part IVA of the ITAA 1936 will apply to a scheme if a person enters into or carries out part of the scheme for the dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme.

It is accepted that the scheme is an ordinary commercial transaction which is not generally entered into by participants for the sole or dominant purpose to enable any taxpayer to obtain a tax benefit. It is also considered that investors in the Unit Trust would be subject to similar tax outcomes if they were to invest in the policy directly as policyholder rather than as a unit holder. Therefore, Part IVA will not apply to a scheme comprising, in whole or in part, the acquisition of Units by the Unit Holders and/or the acquisition of the Policy by the Trustee.

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