ATO Interpretative Decision
ATO ID 2004/923
Income Tax
Portfolio transfer of general insurance liabilities: deduction for payment of claims in respect of assumed outstanding claims liabilitiesFOI status: may be released
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This ATO ID has been amended to insert further explanatory paragraphs at the conclusion of the Reasons for Decision.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Can a general insurance company claim a deduction under section 321-25 of Schedule 2J to the Income Tax Assessment Act 1936 (ITAA 1936) for amounts paid directly relating to the settlement or discharge of claims arising from the assumption of an outstanding claims liability under a portfolio transfer?
Decision
Yes. A general insurance company claim a deduction under section 321-25 of the ITAA 1936 for amounts paid directly relating to the settlement or discharge of claims arising from the assumption of an outstanding claims liability under a portfolio transfer.
Facts
The taxpayer is a general insurance company for the purposes of section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and the Insurance Act 1973.
The taxpayer entered into a portfolio transfer arrangement whereby it assumed the insurance liabilities of another general insurance company (the transferor).
The portfolio transfer is completed in accordance with the provisions of the Insurance Act.
The taxpayer subsequently pays an amount to settle or discharge a claim in respect of the assumed outstanding claims liability.
Reasons for Decision
Section 321-25 of the ITAA 1936 provides that a general insurance company can deduct amounts paid during the year of income that are in respect of claims under general insurance policies.
Amounts paid to settle or discharge claims arising from the assumption of an outstanding claims liability under a portfolio transfer are paid 'in respect of' claims under general insurance policies because the obligation to pay arises under the policies. The fact that the outstanding claims liability was not initially incurred by the taxpayer, but rather was assumed from the transferor, does not alter the outcome that the amounts are paid under a contract of insurance.
Accordingly, the taxpayer is entitled to a deduction under section 321-25 of the ITAA 1936 for an amount paid directly relating to the settlement or discharge of claims arising from the assumption of an outstanding claims liability under a portfolio transfer.
Application of this ATO ID from 1 July 2010
From 1 July 2010, the Tax Laws Amendment (Transfer of Provisions) Act 2010 repealed Schedule 2J of the ITAA 1936 and rewrote those provisions into Division 321 of the ITAA 1997. The wording was slightly altered to adhere to the drafting approach taken in the ITAA 1997, but as outlined in the explanatory memorandum, there has been no change in meaning of the rewritten provisions.
Therefore, from 1 July 2010, all references to Section 321-25 of the ITAA 1936 should be read as referring to section 321-25 of the ITAA 1997.
Date of decision: 1 November 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1936
section 321-25
section 995-1
section 321-25 Insurance Act 1973
the Act 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 2004/915
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 2004/924
ATO ID 2004/925
ATO ID 2004/926
ATO ID 2004/927
ATO ID 2004/928
ATO ID 2004/929
ATO ID 2004/930
Other References:
Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Bill 2010
Keywords
General insurance
General insurance industry
ISSN: 1445-2782