ap_ass01

Life Assurance Bonuses

Life Assurance Bonuses: REVERSIONARY bonuses are tax free, ANNUAL bonuses are taxed

Reversionary bonuses are not always excluded from assessable income

What amount is included in assessable income?

Will the amount received on maturity, surrender or forfeiture with in 10 years of commencement of risk always be included in assessable income?

What happens if the taxpayer does not actually receive the amount but has it re-invested or otherwise dealt with on his behalf or as he directs?

The rebate sugars the bitter pill for recipients of reversionary bonuses?

Life Assurance Bonuses: Are they

REVERSIONARY (tax free) or

ANNUAL (taxed)?

The first thing to bear in mind is that lump sum proceeds of life assurance or endowment policy are CAPITAL - in other words, NOT INCOME. This will be so even if they are received in instalments over a period of time, AS LONG AS these instalments are part of a FIXED capital sum

However, section 26(i) of the 1936 Income Tax Assessment Act includes a bonus (other than a reversionary bonus) on a policy of life insurance in assessable income.

So if it is an annual bonus, and not a reversionary bonus, it is included in assessable income under section 26(i).

So what is a reversionary bonus?

A reversionary bonus is a bonus payable on

maturity,

forfeiture or

surrender

of a

whole of life,

term or

endowment

life assurance policy.

You can find full details at paragraph 10-240 of the CCH Master Tax Guide 10-240.

Answer this question….

Are REVERSIONARY BONUSES included in assessable income by any other provision of the Income Tax Assessment Act?

Yes No

In the bad old days, generous concessional deductions were allowed for contributions to life assurance policies.

These days, such a deduction would only be allowed if it could be shown that the proceeds of the policy would fill the place of a REVENUE item (refer CCH Master Tax Guide 10-220)

But back in long passed era, it was possible to take out a short term policy, get the deductions for the contributions, then surrender the policy.

To ensure that concessional deductions were granted only to genuine purchasers of life assurance policies, section 26 AH was introduced, to 'take back' the deductions from those who were exploiting the provision.

The term reversionary bonus as used in section 26AH can also apply to amounts received under any form of life assurance policy including

investment account or

investment linked policy

which provide

a death benefit

plus

some identifiable type of savings or investment account.

Where a policy is linked to the purchase and sale of investment units, the profit derived on the sale of those units, when paid to the policy holder is regarded as a bonus to which section 26 AH applies.(ITR 2346)

Section 26AH only applies if the date of commencement of the RISK commenced after 28/8/82, and the amount was received after 27/8/82. (section 26 AH (3))

The powers that be tightened up the rules for policies for which risk commenced after 7/12/83.

What amount is included in assessable income?

(if risk commenced after 7/12/83)

Section 26 AH (6) includes

the total reversionary bonus if it is received within 8 years of commencement of risk

2/3 (66.66%) of reversionary bonus if received in the 9th year

1/3 (33.33%) of reversionary bonus if received in the 10th year

Section 26 AH used to be a bit more generous...see section 26 AH (14)

Where the risk commenced before 8/12/83.....

all of reversionary bonus if received in the first 2 years

2/3 (66.66%) of reversionary bonus if received in the 3rd year

1/3 (33.33%) of reversionary bonus if received in the 4th year

Answer this question….

A taxpayer takes out life assurance policy on which risk commenced after 7/12/83. He surrenders after 7 years and receives $1000. How much is assessable?

Within 8 years the total amount is assessable.

Answer this question….

A taxpayer takes out life assurance policy on which risk commenced after 7/12/83. He surrenders in the 9th year and receives $1000. How much is assessable?

If surrendered in the 9th year, only 2/3 is assessable: 2/3 of 1000 is 666.

Answer this question….

A taxpayer takes out life assurance policy on which risk commenced on 7/12/83. He surrenders in the 9th year and receives $1000. How much is assessable? (no $ sign please)

If risk commenced on 7/12/83 (BEFORE 8/12/83), section 26 AH (14) says the definition of eligible period in section 26 AH (1) is 4, not 10, years. So he is well outside the eligible period when he surrenders the policy. (answer = 0)

Will the amount received on maturity, surrender or forfeiture with in 10 years of commencement of risk always be included in assessable income?

Section 26 AH does NOT always include the amount (called a reversionary bonus) received on maturity, surrender or forfeiture with in 10 years of commencement of risk?

Section 26 AH (7) excludes amounts received in consequence of -

(a) (i) death of insured person,

(a) (ii) accident, illness or other disability suffered by the person

(c) forfeiture, surrender or termination due to serious financial difficulties of the taxpayer, UNLESS it was taken out with a view to forfeiture, surrender or termination within 10 years.

(b) the policy being a superannuation policy

What happens if the taxpayer does not actually receive the amount but has it re-invested or otherwise dealt with on his behalf or as he directs?

See section 26 AH(4)

Such amounts are deemed to be received by the taxpayer. But note that section 26 AH (5) makes it clear that directions to reinvest the bonus so as the increase the amount that might reasonably be expected to be received on surrender or maturity would not be deemed to be a receipt of the bonus

What if the taxpayer receives an interest free loan instead of the bonus?

Section 26 AH (11) would deem the value of that loan to be a bonus.

The rebate sugars the bitter pill for recipients of reversionary bonuses?

Section 160 AAB (2) allows a rebate of tax equal to the statutory percentage of any eligible 26 AH amount included in the assessable income of a taxpayer.

Statutory percentage is defined in section 160 AAB 1) as 39%

(unless the policy was issued by a friendly society, in which case it is 33% - though the different rate is being phased out and will be 39% in the 2001 income year)

Eligible section 26 AH amounts are amounts included by section 26 AH under policies with TAXABLE life assurance companies or State Government Insurance Offices of NSW, VIC, QLD, WA, SA (section 160 AAB (1))