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Taxation of an Old Mutual International EIB, ERB, IPB, EIA, CIB, CRB, IP+, MCA, MSA and MPA that are owned by an individual who returns/moves to Australia and becomes an Australian resident.

Life assurance policies

The EIB, IP+, IPB, MCA, MSA, MPA and ERB are regarded as life assurance policies for Australian income tax purposes. However, the life and redemption versions are treated differently for the purpose of the capital gains tax (CGT) provisions of Australia's income tax law.

Tax relief on premiums

Premiums paid to an Old Mutual International policy do not qualify for tax relief in Australia.

Tax on full surrender

EIB, IPB, EIA, CIB and MCA (Life assurance version)

If a policy has made an investment gain and is held for 10 years* or more, any gain made on surrender or maturity may be disregarded if the beneficiary :

  1. is the original beneficial owner of the policy; or
  2. acquired the interest in the policy for no consideration.

*The holding period includes when the policyholder was non-Australian resident.

If additional lump sum premiums (top ups) are made which exceed 125% of the premium(s) paid in the previous policy year, then a new 10 year holding period starts from the date of the top up.

MCA, MSA and MPA (Life assurance versions)

If a policy has made an investment gain and is held for 10 years* or more, any gain made on surrender or maturity may be disregarded if the beneficiary :

  1. is the original beneficial owner of the policy; or
  2. acquired the interest in the policy for no consideration.

*The holding period includes when the policyholder was non-Australian resident.

If regular premiums are increased by more than 125% of the premiums paid in the previous policy year, then a new 10 year holding period starts from the date of the increase.

ERB, CRB IP+, MCA, MSA and MPA (Capital redemption versions)

If a policy has made an investment gain and is held for 10 years or more, any gain made on surrender or maturity is an assessable capital gain of the policy holder under Australia's CGT rules.

Any net assessable net capital gain (after taking into account any available capital losses from other assets) should qualify for a CGT discount concessions if the policy holder is an individual or a complying superannuation fund. These concessions reduce the assessable CGT amount included in taxable income by (in the case of an individual) 50% or (in the case of a complying superannuation fund) 33.33%.

EIB, EIA, IPB, CIB, IP+, MCA, MSA, MPA and ERB - less than 10 complete years

If a policy is held for less than 10 complete years and the policy has made an investment gain then:

  • 100% of the gain is assessable if taken before the policy has been held for eight complete years.
  • 2/3rds of gain is assessable if it is received before the policy has been held for nine complete years.
  • 1/3rd of gain is assessable if received before the policy has been held for ten complete years.

For example, a policy holder returns to Australia and fully surrenders all policies and makes a gain of AUS$60,000.

If the policies were owned for:

  • less than 8 complete years = AUS$60,000 is included in assessable income;
  • less than 9 complete years = AUS$40,000 is included in assessable income; and
  • less than 10 complete years = AUS$20,000 is included in assessable income.

If the policy holder has no available carry forward tax losses or deductions from other investment activity (to offset against this assessable amount), the assessable amount will be included in taxable income and subject to income tax.

If the policy has not made a gain (for example, where the surrender value does not exceed the premium paid), there is no income tax payable.

If the policyholder fully surrenders one or more policies before becoming Australian resident, there should be no liability to Australian income tax.

Tax on partial surrender

The taxation of a partial surrender is treated in the same way as a full surrender.

For example:

Premium: AUS$200,000
Surrender Value at the part surrender date: AUS$ 250,000
Part surrender amount: AUS$10,000

The part surrender is requested 8 ½ years after the contract date

Calculation of the gain/loss:

Partial Surrender amount divided by Surrender Value at the time of the withdrawal multiplied by the difference between the Premium paid and the Surrender Value at the time of the Partial Surrender.

AUS$10,000 divided by AUS$250,000 multiplied by AUS$50,000 =

AUS$2,000

2/3rds of gain is taxable because if it is 8 ½ years after the Contract Date

Therefore AUS$1,333.33 is taxable

Tax on death (EIB, CIB, IPB, EIA and life assurance versions of MCA, MSA and MPA only)

There is no liability to income tax on the death of the relevant life assured.

For example, if the death benefit on the death of the relevant life assured is 101% of the of the bid value of units which is AUS$100,000 on the final valuation date. The death benefit of AUS$101,000 will be paid without any liability to income tax.

Wealth tax

Wealth tax does not apply.

Inheritance tax

There is no inheritance tax in Australia.

Repeal of the Foreign Investment Fund rules

Historically, foreign life policies such as Old Mutual International products were assessed for tax purposes under the Foreign Investment Fund (FIF) provisions of the Income Tax Assessment Act 1936. These rules were repealed in 2010. On the 17 February 2011 draft legislation was issued for public consultation looking to reform the Controlled Foreign Company (CFC) rules and introduce a Foreign Accumulation Fund (FAF) rule which seeks to address the most abusive cases of deferral following the repeal of the FIF provisions.

The FAF rules do not specifically include foreign life policies. The prime purpose of the FAF rules is that they apply if, and only if, there is a dominant purpose of avoiding Australian tax.

Australian Superannuation Schemes

Old Mutual International products can be suitable investments within an Australian Superannuation Fund for a policyholder who returns or moves to Australia. It may be possible for a Old Mutual International EIB and ERB to be transferred into an Australian Superannuation Fund providing certain requirements are met. For more information please refer to our article ‘Australian Superannuation Funds’.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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