ATO Interpretative Decision

ATO ID 2003/767 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. Guidance on the basis of the decision in this ATO ID can be found in Taxation Ruling TD 94/82 Income tax: does the section 26AH of the Income Tax Assessment Act 1936 apply when investment options are 'switched' under an eligible policy? (paragraph 4) and IT 2346 Income tax: bonuses paid on certain life assurance policies - section26AH - interpretation and operation (paragraph 14).
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Issue

If the policyholder converts an income bond to a life insurance policy, can the income bond's date of commencement be carried over as the date of commencement of risk under subsection 26AH(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for the life insurance policy?

Decision

No. When an income bond is converted to a life insurance policy, its date of commencement cannot be carried over as the new policy's date of commencement of risk.

Facts

The taxpayer held a friendly society income bond for more than ten years and now wants to convert it to a life insurance policy. The taxpayer asked whether the date of commencement of the income bond can be carried over as the date of commencement of risk for the life insurance policy for section 26AH of the ITAA 1936 purposes.

Reasons for Decision

Income bond

The definition of 'income bond' was inserted in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) with effect from 1 July 2000 to mean a life insurance policy issued by a friendly society under which bonuses are regularly distributed.

Life insurance policy

A 'life insurance policy' is defined under subsection 995-1(1) of the ITAA 1997 and has the meaning given to the expression life policy in the Life Insurance Act 1995.

A life policy is defined under section 9 of the Life Insurance Act as:

(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.

(2)

A contract that provides for the payment of money on the death of a person is not a life policy if:

(a)

by the terms of the contract, the duration of the contract is to be not more than one year; and

(b)

payment is only to be made in the event of:

(i)

death by accident; or

(ii)

death resulting from a specified sickness.

Although 'income bond' is defined to mean a life insurance policy, an income bond has different conditions than the type of policy defined as an eligible policy under subsection 26AH(1) of the ITAA 1936. For purposes of section 26AH, it is this type of eligible life insurance policy to which the date of commencement of risk applies.

Income bond bonuses are regularly distributed and are assessable under paragraph 26(i) of the ITAA 1936 as non reversionary bonuses. Generally, the types of life insurance policies to which section 26AH of the ITAA 1936 applies provide bonuses that are applied when a life insurance policy is surrendered, forfeited or matures. These are reversionary bonuses which would not be assessable, apart from the operation of section 26AH of the ITAA 1936. Subsection 26AH(6) of the ITAA 1936 includes bonuses in assessable income when received within the first ten years from the date of commencement of risk of an eligible life insurance policy.

When the policyholder converts the income bond to a life insurance policy, the income bond is terminated. The conversion date is the new policy's date of commencement of risk. Paragraph 14 of Taxation Ruling IT 2346 supports this conclusion stating that where a policy is converted to a different policy table (that is, whole of life to endowment assurance), a new eligible policy is created.

In addition, paragraph 4 of Taxation Determination TD 94/82 states that if the policyholder is only able to change their preferred investment options by surrendering the existing policy and entering into a new policy, subsection 26AH(6) of the ITAA 1936 applies and a new eligible period commences.

Accordingly, for the purposes of section 26AH of the ITAA 1936, an income bond's date of commencement of risk cannot be carried over where the policyholder converts an income bond to a life insurance policy. A new date of commencement of risk occurs where an income bond is converted to a life insurance policy.

The discussion in this ATO ID has equal application to section 15-75 of the Income Tax Assessment Act 1997 (ITAA 1997). All references to paragraph 26(i)) should therefore be taken as including reference to section 15-75.

Year of income:  Year ending 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 15-75
   subsection 995-1(1)

Related Public Rulings (including Determinations)
Taxation Ruling IT 2346
Taxation Determination TD 94/82

Keywords
Income bonds
Life insurance policies
Date of commencement of risk

Business Line:  Small Business/Individual Taxpayers

Date of publication:  29 August 2003

ISSN: 1445-2782