ATO Interpretative Decision
ATO ID 2004/915
Income Tax
Portfolio transfer of general insurance liabilities: consideration received by a general insurance company in respect of deferred acquisition costsFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the consideration received by a general insurance company from another general insurance company under a portfolio transfer in respect of deferred acquisition costs assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The amount of consideration received by a general insurance company from another general insurance company under a portfolio transfer in respect of deferred acquisition costs is assessable under section 6-5 of the ITAA 1997.
Facts
The taxpayer is a general insurance company for the purposes of section 995-1 of the ITAA 1997 and the Insurance Act 1973.
The taxpayer entered into a portfolio transfer arrangement whereby the whole of its insurance liabilities are to be transferred to another insurance company (the transferee). The taxpayer intends to cease its insurance operation after the portfolio transfer.
The portfolio transfer is done in accordance with the provisions of the Insurance Act. The transferee is also an authorised general insurer under the Insurance Act.
The taxpayer, in the course of issuing insurance policies to its policyholders, incurred costs commonly referred to in the industry as acquisition costs. These costs were wholly deductible for taxation purposes in the year they were incurred. However, for accounting purposes, these costs were not wholly expensed but were deferred and recognised as they gave rise to premium revenue. The deferred costs are recorded as an asset by the taxpayer. Under the portfolio transfer, the transferee reimburses the taxpayer for these costs.
Reasons for Decision
Section 6-5 of the ITAA 1997 states that 'your income includes income according to ordinary concepts, which is called ordinary income.' The characterisation of the consideration received by the taxpayer will determine whether the amount is assessable under section 6-5 of the ITAA 1997.
It is established law that a reimbursement or recoupment of a previously allowed deduction does not necessarily give rise to assessable income (Federal Commissioner of Taxation v. Rowe (1997) 187 CLR 266; 97 ATC 4317; (1997) 35 ATR 432 and HR Sinclair & Son Pty Ltd v. Federal Commissioner of Taxation (1966) 114 CLR 537; (1966) 14 ATD 194; (1966) 10 AITR 3). Therefore, in determining the assessability of the reimbursement, it is immaterial whether the taxpayer was previously allowed a deduction for the deferred acquisition costs.
In Warner Music Australia Pty Limited v. Federal Commissioner of Taxation (1996) 70 FCR 197; 96 ATC 5046; (1996) 34 ATR 171 (Warner Music) the taxpayer was refunded an amount of sales tax. The Federal Court held that for an amount to be assessable two requirements must be satisfied:
The first involves the question of whether the amount released involved a gain to Warner so as to constitute a profit. The second is whether this profit or gain was on revenue account.
In relation to the first requirement, the reimbursement of the deferred acquisition costs is clearly a gain to the taxpayer.
In relation to the second requirement, the characterisation of a receipt is determined by examining the receipt in the hands of the recipient. In Warner Music, Hill J stated that an amount will be assessable if it is in respect of an expenditure that is 'intimately connected' with the business even though it is outside the ordinary course of a taxpayer's business.
The reimbursement of deferred acquisition costs, whilst not necessarily a frequent aspect of the taxpayer's business, is nevertheless integral to the taxpayer's general insurance business. Accordingly, even though the reimbursement takes place in the context of a cessation of the taxpayer's insurance operation, an infrequent transaction, the reimbursement is regarded as an incident of the taxpayer's business of providing insurance. The reimbursement of the deferred acquisition costs is therefore 'intimately connected' to the ordinary business of the taxpayer.
Accordingly, the reimbursement of the deferred acquisition costs by the transferee will be assessable to the taxpayer under section 6-5 of the ITAA 1997.
Date of decision: 1 November 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
section 6-5
section 995-1
the Act
Case References:
Federal Commissioner of Taxation v. Rowe
(1997) 187 CLR 266
97 ATC 4317
35 ATR 432
(1966) 114 CLR 537
(1966) 14 ATD 194
(1966) 10 AITR 3 Warner Music Australia Pty Ltd v. Federal Commissioner of Taxation
(1996) 70 FCR 197
96 ATC 5046
(1996) 34 ATR 171 Related ATO Interpretative Decisions
ATO ID 2004/910
ATO ID 2004/911
ATO ID 2004/912
ATO ID 2004/913
ATO ID 2004/914
ATO ID 2004/916
ATO ID 2004/917
ATO ID 2004/918
ATO ID 2004/919
ATO ID 2004/920
ATO ID 2004/921
ATO ID 2004/922
ATO ID 2004/923
ATO ID 2004/924
ATO ID 2004/925
ATO ID 2004/926
ATO ID 2004/927
ATO ID 2004/928
ATO ID 2004/929
ATO ID 2004/930
Keywords
General insurance
General insurance industry
ISSN: 1445-2782