ATO Interpretative Decision
ATO ID 2004/920
Income Tax
Capital Gains Tax: portfolio transfer of general insurance liabilities - acquisition of asset by transferor as against transfereeFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does a general insurer, upon a full portfolio transfer, acquire a CGT asset, as against the transferee, for the purposes of Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) where the insurer undertook a full portfolio transfer by entering into a scheme for the transfer or amalgamation of insurance business under Division 3A of Part III of the Insurance Act 1973 and the portfolio transfer results in the general insurer having no ongoing liability at law to meet the claims arising from the transferred policies?
Decision
No. The general insurer does not acquire a CGT asset for the purposes of Parts 3-1 and 3-3 of the ITAA 1997, upon a full portfolio transfer, where the full portfolio transfer was undertaken in accordance with Division 3A of Part III of the Insurance Act and the portfolio transfer results in the general insurer having no ongoing liability at law to meet the claims arising from the transferred policies.
Facts
The transferor is a general insurance company for the purposes of section 995-1 of the ITAA 1997 and the Insurance Act.
The transferor undertook a full portfolio transfer by entering into a scheme for the transfer or amalgamation of insurance business under Division 3A of Part III of the Insurance Act (the scheme), whereby the whole of its business is transferred to another insurance company (the transferee).
Following the portfolio transfer, the transferor ceased its business operations.
The scheme was confirmed by the Federal Court, and the Australian Prudential Regulation Authority (APRA) revoked the insurer's authorisation under section 15 of the Insurance Act.
The transferor will have no ongoing liability at law to meet the claims arising out of the policies transferred as a result of a scheme.
Reasons for Decision
In Federal Commissioner of Taxation v. Orica Limited (1998) 194 CLR 500; 98 ATC 4494; (1998) 39 ATR 66 (the Orica Case) the taxpayer (Orica) entered into an agreement with the Melbourne Metropolitan Board of Works (MMBW) whereby MMBW agreed to assume Orica's obligations to repay the principal amounts due on debentures issued by Orica on their respective maturity dates.
The High Court held that following the making of the agreement with MMBW, Orica remained liable on its debentures and the obligations of MMBW under the agreement did not discharge Orica from that liability. As a result, Orica, at all material times, retained the primary obligation to the debenture holders.
Accordingly, by entering into the arrangement with MMBW, Orica acquired a CGT asset being the right to compel MMBW to pay Orica's debenture holders the principal amounts as and when they became due. Each performance and discharge by MMBW of its obligations under the agreement constituted a part ending or part satisfaction of Orica's CGT asset (a C2 CGT event happening to the relevant 'part' of Orica's CGT asset).
Following confirmation of the scheme by the Federal Court and steps taken by APRA to revoke the transferor's authorisation under section 15 of the Insurance Act, the transferor has no ongoing liability at law to meet the claims arising out of the policies it transferred because of a portfolio transfer. Therefore, as the transferor has been discharged from its liabilities to the policyholders, the portfolio transfer does not result in the transferor acquiring a CGT asset as against the transferee.
Accordingly, the decision in the Orica Case can be distinguished from the situation of a full portfolio transfer that takes place under Division 3A of Part III of the Insurance Act, and as the transferor does not acquire an asset, Parts 3-1 and 3-3 of the ITAA 1997 do not apply.
Date of decision: 1 November 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
Part 3-1
Part 3-3
section 995-1
Part III Division 3A
section 15
Case References:
Federal Commissioner of Taxation v. Orica Ltd
(1998) 194 CLR 500
98 ATC 4494
ATO ID 2004/910
ATO ID 2004/911
ATO ID 2004/912
ATO ID 2004/913
ATO ID 2004/914
ATO ID 2004/915
ATO ID 2004/916
ATO ID 2004/917
ATO ID 2004/918
ATO ID 2004/919
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
Capital gains tax
ISSN: 1445-2782