Australia Has No Capital Gains Tax Discount Inside PPLI – But It Does Something Better

Australia’s 50% CGT discount is one of the world’s most generous investment tax concessions. PPLI does not replicate it. But for the right client, it does something the CGT discount cannot.

Start with a sentence I would not have written before 2010: PPLI is now meaningfully usable for Australian tax residents. The Foreign Investment Fund (FIF) rules — the historical reason advisers in this market kept offshore life policies at arm’s length — were repealed by the Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010, replaced by a much narrower anti-roll-up regime that targets debt-heavy passive entities rather than diversified investment-linked life policies. The practical effect is that for an Australian-resident client, the question of holding offshore PPLI has moved from ‘almost never’ to ‘sometimes, on specific facts.’

But the headline benefit Australian advisers reach for first — the 50% CGT discount for assets held more than 12 months under Division 115 of ITAA 1997 — does not exist inside a PPLI policy. The discount is a concession for the policyholder, not the policy. Internal portfolio rebalancing inside a PPLI does not trigger CGT for the policyholder (because the policyholder is not the legal owner of the underlying assets), but it also does not access the CGT discount. The carrier owns the assets; the policyholder owns a contractual right against the carrier. So when the policyholder eventually realises a gain on the policy itself, the analysis runs through section 26AH of ITAA 1936, not through the CGT discount.

Section 26AH — the ten-year rule

Section 26AH is the operative provision. It treats bonuses received from a life assurance policy as fully assessable in the first eight years from the date of commencement of risk; assessable to two-thirds in the ninth year; assessable to one-third in the tenth year; and excluded from assessable income from the start of year eleven onwards. There is also a 125% rule in section 26AH(13): if the premium paid in any policy year exceeds 125% of the prior year’s premium, the eligible period restarts.

Two implications follow. First, PPLI is a long-horizon tool. Clients who plan to draw on the policy in less than ten years are paying a structuring cost for a tax outcome that section 26AH will partly or wholly recover. Second, PPLI works best where the alternative is a portfolio held in direct personal name that would otherwise generate annual rebalancing CGT and distribution tax. Inside the policy, internal trades and credited yields are not policyholder income; outside, every rebalancing event is a CGT event. Over a ten-year holding period in a high-turnover portfolio, the deferral compounds.

Where PPLI works for residents — and where it does not

PPLI does not replace superannuation. Super remains the first dollar of long-term Australian saving: 15% earnings tax in accumulation phase, tax-free in retirement phase, and an asset-protection regime second to none. PPLI does not enjoy super’s 15% cap and is not a deductible contribution. But super is constrained — contribution caps, the Transfer Balance Cap, SIS Act investment rules, and preservation-age access. PPLI is complementary, not competitive, for HNW Australians who have filled the available super envelope and still have capital to deploy across decades.

The genuine cases for PPLI for an Australian resident are four. One: asset protection. The policy assets sit on the carrier’s balance sheet; the policyholder’s claim is contractual. For business owners, directors and medical professionals exposed to creditor risk, this is a meaningful structural protection — provided the policy is set up well before any creditor event and is not a voidable transaction under the Bankruptcy Act. Two: succession planning where beneficiaries are non-residents. CGT event K3 (s.104-215 ITAA 1997) can trigger a substantial liability when an Australian-resident’s assets pass on death to a foreign-resident beneficiary; a policy paid to a named beneficiary by the carrier under contract is not a ‘passing’ of a CGT asset within section 128-20. Three: pre-departure structuring for clients moving to France, Germany, Italy or the UK — the policy is established before tax residency is acquired in the destination country, with the destination regime taking over from that point. Four: long-horizon offshore investment management where the alternative is direct-name holding with annual CGT and distribution churn.

What to avoid

Three patterns to avoid. The first is investor-control structuring. Australian law does not codify investor-control rules in the way US law does, but where the policyholder’s control over individual asset selection is so extensive that the policy is in substance a custody arrangement, the Commissioner has tools — Part IVA, the general law — to disregard the wrapper. Investment management should be at the level of strategy or appointed manager mandate, not security-by-security direction.

The second is breaching the 125% premium rule by accident. Top-ups, additional premiums and partial assignments can reset the eligible-period clock if not modelled carefully. The 125% test is mechanical; it does not forgive intent.

The third is trust-owned PPLI without addressing section 99B ITAA 1936. The ATO’s PCG 2024/3 and TD 2024/9 have made the Commissioner’s broad reading of section 99B explicit: amounts of foreign trust property paid or applied to or for the benefit of Australian resident beneficiaries are caught. Direct policy ownership avoids this entirely; trust ownership requires careful drafting and a clear understanding of the distribution path on payout.

The honest summary

PPLI for Australian residents is not the European story. There is no annual deferral that runs forever. There is, instead, a specific statutory regime that rewards long-horizon holding, statutorily separated assets from creditors, a clean succession path for cross-border families, and a pre-departure structuring window for clients moving offshore. None of this replaces the 50% CGT discount for a client whose alternative is a long-held direct equity portfolio. But for the client whose portfolio is high-turnover, whose creditors are real, whose family is international, or whose passport is about to change — PPLI is the tool for the job.

Advisers who default to ‘PPLI doesn’t work in Australia’ are working from a pre-2010 mental model. The provisions that drive the analysis today are section 26AH ITAA 1936, section 118-300 ITAA 1997, Part IVA and section 99B. Each is technical. Each is workable. None requires the kind of structural contortion that the old FIF regime did.