When a life insurance policy has been held by the taxpayer for 10 years or longer, reversionary bonuses received on that policy are 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 acquiredunder a life assurance policy that was part of a superannuation fund or schemewhen the person on whose life the policy was effected dies, has an accident, illness or other disability, oras a result of serious financial difficulties, provided the policy was not taken out with a plan to mature or be terminated within 10 years.
Assessable amount The assessable amount of a bonus on short-term life policy is:
the full bonus if received during the first eight years of the policy2/3 of the bonus if received in the ninth year of the policy1/3 of the bonus if received in the 10th year of the policy, ornil if received 10 or more years after the policy started.
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: IT 2346 states that fixed premiums are not taken to have increased just because they are paid in advance or arrears.
Example: 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.
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 (ATO ID 2003/767).
Life policy bonuses and tax Life policy bonuses and tax Life policy bonuses
# [bonus], [insurance], [life policy], [tax]
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