Beaconsfield (03) 9707 0555
Cranbourne (03) 5995 2700
Pakenham (03) 5940 4555
Warragul (03) 5622 1793
When a life insurance policy has been held by a taxpayer for 10 years or longer, reversionary bonuses received on that policy are generally tax-free. For policies held for less than 10 years, stipulated amounts are included in the taxpayer’s assessable income, and a tax offset is available.
A bonus is not assessable income if it is received:
– at least 10 years after the policy was first acquired,
– under a life assurance policy that was part of a superannuation fund or scheme when the person on whose life the policy was effected dies, has an accident, illness or other disability, or
– as a result of serious financial difficulties, provided the policy was not taken out with a plan to mature or be terminated within 10 years.
The assessable amount of a bonus on a short-term life policy is:
Losses on policies cannot be claimed as a deduction.
Resetting of policy commencement date
Where a policy risk started after August 27, 1982, and premiums are increased by more than 25% of the premium payable in the preceding year, the policy is deemed to recommence on the anniversary of the date it started (in the year that increased premium was paid).
This has the effect of resetting the start date of the policy and results in bonuses being fully or partially assessable within 10 years from the new start date. That effect can be avoided if the excess premium (the part that exceeds a 25% increase) is paid into a new policy rather than the existing policy.
Note that the ATO rulings on this states that fixed premiums are not taken to have increased just because they are paid in advance or arrears. The ruling concerned states: If a policy started on 1 June 2010, and the policy owner paid a $500 premium in 2012, 2013 and 2014 respectively, and an $800 premium in 2015, the deemed date of commencement would become 1 June 2015.
Another ATO determination states that if an income bond is converted to a life insurance policy, the income bond is terminated and the commencement date cannot be carried over to the insurance policy.
DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Ltd (ABN 96 075 950 284).