Reinsurance with non-resident reinsurers

Income tax requirements

The rules relating to reinsurance with a non-resident reinsurer are contained in section 148 of the Income Tax Assessment Act 1936 (ITAA 1936).

If you make an election under this section, you may be liable to pay tax as agent for the non-resident reinsurer.

For more information see:

• Section 148 of the ITAA 1936

When the premiums are taxable in Australia

If you make an election under section 148, the premiums paid or credited in respect of the reinsurance are included in the assessable income of the non-resident reinsurer.

Premiums paid to an Australian principal office or branch of a non-resident reinsurer are not covered by the rules relating to reinsurance with non-resident reinsurers. However, the Australian principal office or branch of the non-resident reinsurer may be subject to Australian tax on its Australian source insurance business.

Consequences of election for the Australian insurer

If you make an election under section 148, you are allowed a deduction for the premiums from your assessable income. Further, amounts you recover from the non-resident reinsurer in respect of a loss on any risk reinsured need to be included in your assessable income.

An election applies to all the premiums paid or credited to non-resident reinsurers by you. Therefore, an election can't be in respect of only some of the premiums.

An election operates from the date of commencement of the income year to which the election applies, not the date the election is made. You need to retain monies to cover the tax payable, but only from those premiums applicable to contracts made after the election starts to operate. An election is irrevocable.

If you don't make an election under section 148, you are not allowed a deduction for the premiums and your assessable income won't include any amounts recovered from the non-resident reinsurer, nor commissions and expenses received under the reinsurance agreement.

For more information see:

• IT 2367 Income Tax: Reinsurance with non-residents: Calculation of premiums and unearned premium reserve.
• TD 93/31 Income tax: insurance: reinsurance: can an election be made under subsection 148(2) in respect of some, as against all, of the reinsurance premiums a resident insurer pays to non-resident reinsurers?
• TD 96/10 Income tax: general insurance: when an election is made under subsection 148(2) of the Income Tax Assessment Act 1936('the Act'), are all amounts paid or credited or received or debited in respect of reinsurance contracts made prior to the making of the election, deductible or assessable respectively to the Australian insurer?
• TD 96/11 Income tax: general insurance: what obligations does an Australian insurer have under the Income Tax Assessment Act 1936 ('the Act') when an election is made under subsection 148(2) of the Act?

How tax relating to reinsurance with non-resident reinsurers is calculated

If you have made an election under section 148, the tax payable is calculated as 10% of the gross amount of the premiums paid to non-resident reinsurers, multiplied by the applicable corporate tax rate.

Where an election is made under section 148, premiums are inclusive of commissions paid to you by the non-resident reinsurer, including ceding commissions. Accordingly, commissions receivable from the non-resident reinsurer don't reduce the amount on which liability to pay tax is worked out.

What you need to do

You need to fulfil certain tax obligations as agent for a non-resident reinsurer if you have made an election under section 148:

• If you don't have a tax file number (TFN) as agent for the non-resident reinsurer, apply for one – see TFN application for companies and other organisations. This TFN is separate to your own TFN.
• Retain sufficient monies from the gross amount of the premiums paid to the non-resident reinsurer to cover the tax. The amount to be retained is 10% of the gross premiums paid or credited to the non-resident reinsurer multiplied by the applicable corporate tax rate.
• Complete an as agent for tax return (AAF return) at the end of the income year. Where you paid premiums to more than one non-resident reinsurer during the year, complete an aggregated AAF return. For further detail see Division 15 – how to fill out the as agent for company tax return.
• Lodge an AAF return in respect of each income year to which the election applies. You must lodge the AAF return by the first day of the sixth month of the following year of income – unless we advise it must be lodged by a different date.
• Pay the tax to us by the due date specified in the notice of assessment.

 

This is not a withholding tax

Tax relating to reinsurance with non-resident reinsurers is different to withholding taxes. You don't:

• have pay as you go (PAYG) obligations
• need to obtain an Australian business number
• need to complete a business activity statement.

Substituted accounting periods

If you have a substituted accounting period (SAP) and you want to lodge the as agent for non-resident reinsurer return using the same SAP, you need to make a separate SAP application.

For more information see:

• Applying for a substituted accounting period

 

Application to a life insurance company

Where the Australian insurer is a life insurance company, the rules relating to reinsurance with a non-resident reinsurer only apply to the accident and disability business of the life insurance company. This business includes risks covered by:

• accidental death insurance
• total and permanent disability insurance
• trauma insurance
• income protection insurance.

The non-resident reinsurer rules don't apply to pure death life insurance, such as term life insurance, nor to a contract for consumer credit insurance.

Division 15 – how to fill out the as agent for company tax return

These instructions are only for the purpose of completing a return as agent for non-resident reinsurers (AAF return).

Unless the following instructions specify, the company tax return should be completed as normal.

Company information

Tax file number (TFN):

• Use the TFN allocated for AAF return purposes only.

Name of company

Provide the name of the entity that is acting as agent, for example ABC Company Pty Ltd as agent for Non-Resident Reinsurers.

Question 2 – Description of main business activity

Provide the description 'Acting as agent for Non-Resident Reinsurer'.

Provide the industry code number '99050'.

Question 3 – Status of company

Select Resident C1.

Select Private D9 or Public D10.

Select Significant global entity G1 if the entity acting as agent was a SGE at any time during the income year.

Don't select Country by country reporting entity G2.

Question 6 – Calculation of total profit or loss

Enter at label R Other gross income, an amount equal to 10% of the gross amount of the premiums paid to the non-resident reinsurers.

Enter the amount you have shown at label R also at label S Total income and at label T Total profit or loss.

Question 7 – Reconciliation to taxable income or loss

At label G Did you have a CGT event during the year? - select No.

Complete label T Taxable/net income, as usual. This is the amount shown at label T Total profit or loss in Question 6.

Overseas transactions or interests/thin capitalisation

At labels X and Y for the questions under the heading International related party dealings/transfer pricing, select No.

At label Z for the question under the heading Overseas interests, select No.

At label O for the question under the heading Thin capitalisation, select No.

Calculation statement

Complete as usual.

Declarations

Complete as usual.