A bonus is not assessable income if it is received:
at least 10 years after the policy was first acquired,
under a life assurance policy that was part of a superannuation fund or scheme when the person on whose life the policy was effected dies, has an accident, illness or other disability, or
as a result of serious financial difficulties, provided the policy was not taken out with a plan to mature or be terminated within 10 years.
The assessable amount of a bonus on a short-term life policy is:
the full bonus if received during the first eight years of the policy
2/3 of the bonus if received in the ninth year of the policy
1/3 of the bonus if received in the tenth year of the policy, or
nil 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 that the ATO rulings on this states that fixed premiums are not taken to have increased just because they are paid in advance or arrears. The ruling concerned states: 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 state of commencement would become 1 June 2015.
Another ATO determination states that 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.