The Department of Finance Friday published proposals that aim to reform the tax rules that deal with the exemption status of life insurance policies.
The federal budget in 2012 promised changes to the rules that determine whether a life insurance policy is considered exempt or not. The test aims to distinguish between policies that are designed as protection versus those that are primarily investments, and taxes them differently — income earned in a non-exempt policy is taxed as interest income on an accrual basis at the policyholder level. Whereas income earned in an exempt policy is subject to a 15% minimum tax (the Investment Income Tax) that is levied on the insurer.
Finance indicates that its proposals aim to reform the rules in this area, which were introduced in the early 1980s, in various ways, including: determining whether a policy is an exempt policy; the types of transactions that give rise to a disposition of an interest in a policy; the tax treatment of a disposition of an interest in a policy; and related amendments to the Investment Income Tax. The proposals would also amend the rules applying to the determination of the capital element of annuity payments for certain annuity contracts.
After consulting on these proposals since the 2012 budget, and reiterating in this year’s budget that it intends to go ahead with these reforms, the government has issued proposed legislation to enact those changes. The proposals will be out for comment until November 6.
The proposals also include grandfathering provisions for existing policies, so the way the rules apply depends upon the date on which an interest in the policy was last acquired and, in some cases, the date of issuance of the policy.