House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Portfolio transfers

Outline of chapter

1.1 Amendments 2 and 3 amend the GST Act to ensure that the correct GST result is achieved where an insurer has transferred its insurance portfolio to another insurer. In particular, the amendments ensure that the insurance provisions within the GST Act apply as if the transferee insurer were the insurer in relation to the insurance policy.

Context of amendments

1.2 Division 78 of the GST Act sets out the GST treatment for payments or supplies made between insurers, insureds and certain third parties. Generally, the supply of anything in settlement of a claim under an insurance policy is not a taxable supply and a payment or supply made by an entity in settlement of a claim under an insurance policy is not consideration for a supply made by the recipient of the payment or supply. The GST legislation also provides insurers with various increasing and decreasing adjustments.

1.3 The insurance industry has advised that it is not unusual for one insurer to transfer a book of insurance to another insurer. These transfers are known within the industry as a portfolio transfer. Where a portfolio transfer has occurred, the provisions within Division 78 of the GST Act may not apply to give the appropriate GST outcome. For example, the decreasing adjustment available under section 78-10 of the GST Act and the denied input tax credit under section 78-30 of the GST Act, only apply to the insurer that issued the policy.

1.4 The inability of insurers to claim decreasing adjustments has been highlighted by the financial collapse of the HIH group of companies. As a result of various contractual arrangements with HIH companies, portfolio transfers have occurred so that some insurers have undertaken to make payments under insurance policies issued by an HIH company. There are a variety of other situations where such a portfolio transfer can arise.

Summary of new law

1.5 The amendments will amend the GST Act to ensure that the correct GST result is achieved where an insurer has transferred its insurance portfolio to another insurer. The amendments ensure that the insurance provisions within the GST Act apply as if the transferee insurer were the insurer in relation to the insurance policy. In particular, the amendments ensure that, regardless of which insurer issued the policy:

•

decreasing adjustments may be available to an insurer that is settling a claim under an insurance policy that was a taxable policy; and

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an insurer is not entitled to input tax credits on acquisitions made by the insurer to provide in settlement of a claim under an insurance policy that was a GST-free policy.

Detailed explanation of new law

1.6 Amendment 2 inserts new section 78-118 into the GST Act. The new section ensures that where a portfolio transfer has occurred, the insurance provisions within the GST Act apply as if the transferee insurer were the insurer in relation to the insurance policy. [Amendment 2, Schedule 5, item 9A, section 78-118]

1.7 The new section only applies where a portfolio transfer has occurred. Generally, a portfolio transfer occurs where an arrangement is entered into by 2 insurers and under the arrangement the second insurer undertakes to meet the liabilities, such as the liability to pay claims, under insurance policies issued by the first insurer. A portfolio transfer is contractual in nature and does not include situations where statutory provisions may provide that an entity will assume liability for a claim without any contractual agreement between the 2 insurers. For example, legislation providing for compulsory third party schemes may also provide that where an insurer is declared to be insolvent, the Nominal Defendant is liable to meet claims under a compulsory third party insurance policy issued by the insolvent insurer. This assumption of liability by the Nominal Defendant would not be an arrangement in the nature of a portfolio transfer.

1.8 In particular, the amendments ensure that:

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anything done by the transferee insurer is done under the insurance policy if it would have been done under the policy by the first insurer;

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regardless of which insurer issued the policy:

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decreasing adjustments may be available, under section 78-10 of the GST Act, to an insurer that is settling a claim under an insurance policy that was a taxable policy; and

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an insurer is not entitled to input tax credits, under section 78-30 of the GST Act, on acquisitions made by the insurer to provide in settlement of a claim under an insurance policy that was a GST-free policy; and

•

where there is a payment of an excess to either the transferor or transferee insurer, the insurer that settles the claim under the insurance policy is the insurer that has an increasing adjustment under section 78-18 of the GST Act.

[Amendment 2, Schedule 5, item 9A, section 78-118]

1.9 The decreasing adjustment available to the transferee insurer is calculated under section 78-15 of the GST Act and is limited to the amount to which the insurer that issued the policy would have been entitled, if it had made the settlement of the claim under the insurance policy. The first insurer will not be entitled to a decreasing adjustment under section 78-10 of the GST Act because it no longer settles a claim under the insurance policy.

Example 1.1

Ostrich Insurance Company (Ostrich) and Whyte Nite Insurance Company (Whyte Nite) enter into an arrangement where Ostrich transfers its home and contents insurance portfolio to Whyte Nite. The arrangement is in the nature of a portfolio transfer and Whyte Nite has undertaken to settle claims that may arise from those policies that had been issued by Ostrich. Section 78-118 provides that Division 78 of the GST Act applies to Whyte Nite as if Whyte Nite were an insurer in relation to the policies.

If Ostrich had settled a claim under one of the insurance policies (and the insurance policy had not been transferred):

•

the supply of something by Ostrich in settlement of the claim would not be a taxable supply;

•

any payment or supply made by an entity in settlement of a claim under an insurance policy is not consideration for a supply made by the recipient of the payment or supply; and

•

a decreasing adjustment would be available to Ostrich (where section 78-10 of the GST Act is satisfied).

Section 78-118 of the GST Act operates to ensure that the same outcome arises for payments or supplies made by Whyte Nite in settlement of a claim under the transferred insurance policy.

In particular, when Whyte Nite settles claims under an insurance policy issued by Ostrich, Whyte Nite would be entitled to a decreasing adjustment under section 78-10 of the GST Act to the same extent that Ostrich would have if the insurance policy had not been transferred.

Application and transitional provisions

1.10 These amendments apply, and are taken to have applied to GST returns and net amounts for tax periods starting, or that started, on or after 1 January 2001. As a result, insurers who have been transferred HIH insurance policies may be entitled to a decreasing adjustment when they settle a claim under an HIH insurance policy. [Amendment 3, Schedule 5, item 14]