Many families from Singapore, Hong Kong, Taiwan, Malaysia and mainland China hold life insurance policies bought years before anyone thought about moving to Australia. Some are simple term policies. Many others are savings, endowment, participating, investment-linked or universal life policies — products that are as much about building and holding wealth as about insurance.
While you live overseas, the tax treatment of those policies is usually a matter for the country where you live. Once you become an Australian tax resident, Australia generally taxes your worldwide income. Bonuses, surrender values, withdrawals and other amounts you receive from an offshore policy may then need to be considered under Australian tax law. The timing of decisions — before or after you arrive — can make a real difference.
Not all “insurance” is the same
It helps to sort your policies into two broad groups:
- Pure risk cover — term life, critical illness, total and permanent disability or income protection policies that pay only if an insured event happens. These usually have little or no cash value.
- Savings and investment-type policies — endowment, whole-of-life with bonuses, participating policies, investment-linked policies and universal life policies, which build up a cash or surrender value over time.
It is mainly the second group that raises Australian tax questions, because these policies can produce a gain when they are surrendered, mature or are partly withdrawn.
The 10-year rule for eligible life policies
Australia has a long-standing set of rules for bonuses on certain life assurance policies, found in section 26AH of the Income Tax Assessment Act 1936. In broad terms, for an “eligible policy”:
- if the policy is surrendered, matures or is otherwise terminated within the first eight years, the bonuses received are generally included in assessable income in full;
- in the ninth year, generally two-thirds of the bonus is included;
- in the tenth year, generally one-third is included; and
- after ten years, bonuses are generally not assessable under these rules.
Where an amount is included, a tax offset may be available in some cases. There is also an important anti-avoidance feature: if the premium paid in a year is more than 125% of the premium paid in the previous year, the 10-year period may effectively restart. Large top-ups to an existing policy can therefore reset the clock.
Amounts paid because of death, or because of disability, injury or illness, are generally treated differently from bonuses received on surrender or maturity.
Does your offshore policy actually qualify?
This is the critical question. The 10-year rule applies to genuine life assurance policies. Some products sold offshore under the label “insurance” have only a thin layer of life cover wrapped around what is really an investment portfolio. Depending on how the product is structured, the Australian Taxation Office may regard it as an investment, or in some cases as an arrangement that operates like a foreign trust, rather than as life assurance. If that is the case, different rules may apply to the income and gains inside the policy and to amounts you take out.
Whether a particular policy qualifies depends on its terms, the insurer, how the cash value is calculated and what you can control. This is not something that can be decided from a product brochure. Specific tax advice is essential.
Withdrawals, policy loans and ownership changes
Even where a policy is a genuine life policy, other transactions can raise questions:
- Partial withdrawals or partial surrenders may be treated as receipt of bonuses or gains.
- Policy loans are commonly offered by offshore insurers. How they are treated, and what happens if the loan is later set off against the surrender value, needs to be understood.
- Changing the owner — for example, transferring a policy from a parent to an adult child who lives in Australia — can have tax and estate planning consequences in both countries.
- Arrangements designed mainly to avoid tax may attract Australia’s general anti-avoidance rules. Restructuring should have genuine commercial and family reasons, and be properly documented.
Death benefits and income protection
Life insurance proceeds paid on death to the original beneficiary or policy owner are generally not taxed in Australia. Income protection benefits, by contrast, generally replace income and are generally assessable. Lump sum disability and trauma payments are usually treated differently again. Check how each benefit under your policy is described.
The ATO may already know
Many offshore insurers are reporting financial institutions under the Common Reporting Standard (CRS). Once you are recorded as an Australian tax resident, information about cash-value policies may be exchanged with the ATO. Families should assume that offshore policies will be visible and plan on that basis.
Review before you arrive
The most useful time to look at offshore policies is before you become an Australian tax resident. A practical review may include:
- listing every policy, the owner, the insured person, the beneficiaries and the start date;
- gathering records of every premium paid, with dates and currency;
- obtaining current surrender values and bonus statements;
- identifying which policies are risk-only and which are savings or investment-type;
- considering, with your tax adviser, whether to keep, surrender, restructure or stop topping up each policy before residency begins; and
- noting currency issues, because amounts will generally need to be expressed in Australian dollars.
Composite hypothetical: a Hong Kong family
This is an anonymised composite example, not a real family. Mr and Mrs Leung hold three Hong Kong policies: a term policy, a participating endowment started six years ago, and an investment-linked policy started two years ago with a large single premium. They plan to move to Melbourne next year on a permanent visa.
On review, the term policy raises no real issue. The endowment is within its first eight years, so a surrender after they arrive may produce an assessable amount if it is an eligible policy. The investment-linked policy holds mainly fund units with modest life cover, so its classification needs careful advice. They also planned to add a large top-up to the endowment — which may restart the 10-year period. With advice from their tax adviser, they decide what to do with each policy before moving, and keep a full record of premiums and values at the date they become residents.
Read the fine print
Some products sold offshore carry high upfront and ongoing fees, surrender charges and limited disclosure. Before making tax decisions, make sure you understand what you will actually receive — the guaranteed and non-guaranteed parts, the charges, and any penalty for early surrender.
Frequently asked questions
Do I have to surrender my offshore policies before moving to Australia?
No. Many families keep their policies. The point is to understand how each policy may be treated once you are resident and to make deliberate decisions, ideally before you arrive, with advice from a registered tax agent or tax adviser.
If my policy is more than ten years old, is everything tax-free?
Not necessarily. The 10-year rule generally applies only to eligible life assurance policies, and large premium increases may restart the period. If the product is really an investment wrapper, different rules may apply regardless of its age.
Will my children be taxed on a death benefit from my policy?
Life insurance proceeds paid on death to the original beneficiary are generally not taxed in Australia. However, the estate planning position, ownership of the policy and the rules of the country where the insurer is located should also be checked.
How Chua Tan Associates can help
Chua Tan Associates advises families, trustees and beneficiaries across Australia on the legal side of cross-border wealth, including how offshore policies fit into wills, trusts and family arrangements. We are lawyers, not tax agents: we work alongside your registered tax agent or tax adviser, and with local lawyers overseas, so that legal and tax advice fit together. We advise in English, Mandarin and Cantonese.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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