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Chapter 35: Life insurance policyholders

A case for reform

The taxation treatment of bonuses paid on investment policies is inconsistent with the taxation treatment of competing products. This can lead to distorted investment decisions.

Inequities arise because bonuses are rarely taxed at investors’ marginal tax rates.

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A strategy for reform

To change the taxation treatment of bonuses assigned to investment policies.

To apply the redesigned imputation system.

To retain the current taxation treatment of risk benefits.

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Key policy issues Taxation of new policies Taxation of existing policies
When would a policyholder be taxed? What amount would be assessable? Could a deduction be claimed for fees paid to a life insurer? How should they be taxed?
Option 1
Calculate and pay net tax each year or when bonuses are received.

Option 2
Calculate the net tax shortfall each year and pay any tax at that time or when the bonuses are received.

Option 3
Calculate and pay net tax when bonuses are assigned (the timing of which could be flexible).

Option

Depends on type of policy:
- investment-linked policies;
- investment account policies;
- whole-of-life and endowment policies.

Option
Determine under general deduction provisions of the income tax law.
Option 1
Apply the current tax treatment.

Option 2
Apply the redesigned imputation system to policies terminated within 10 years.

Option 3
Apply the redesigned imputation system to all policies.