ATO Interpretative Decision
ATO ID 2004/924
Income Tax
Portfolio transfer of general insurance liabilities: amount received by taxpayer to assume unearned premium liability of a general insurance companyFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is the amount of consideration received by a general insurance company from another general insurance company in respect of the unearned premium liability under general insurance policies transferred under a portfolio transfer assessable under section 321-45 of Schedule 2J to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. The amount of consideration received by a general insurance company from another general insurance company in respect of the unearned premium liability under general insurance policies transferred under a portfolio transfer is assessable under section 321-45 of the ITAA 1936.
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 done in accordance with the provisions of the Insurance Act.
Under the portfolio transfer, the transferor paid an amount to the taxpayer in consideration for the taxpayer assuming the transferor's unexpired risk liability under general insurance policies. This is commonly referred to in the insurance industry as the unearned premium liability. The assumption of this liability obligates the taxpayer to provide insurance cover under policies of insurance the subject of the portfolio transfer for the balance of the term of the insurance contract period.
Reasons for Decision
Section 321-45 of the ITAA 1936 includes in the assessable income of a general insurance company the gross premiums received or receivable during the income year in respect of general insurance policies.
The words 'gross premium' are not defined under the ITAA 1936 or the ITAA 1997 but its commonly understood meaning is consideration for a contract of insurance or assurance.
Similarly, the words 'in respect of' are not statutorily defined and their definition is obtained from case law.
In Technical Products Pty Ltd v. State Government Insurance (Q) (1989) 167 CLR 45 the High Court interpreted the words 'in respect of' to:
... have a very wide meaning. Indeed, they have a chameleon-like quality in that they commonly reflect the context in which they appear...That nexus will not, however, exist unless there be some discernible and rational link...
Under the portfolio transfer arrangement, the transferor is to pay an amount to the taxpayer equating to the accounting value of the unearned component of the original premiums received by the transferor under the policies of insurance. This payment is made to compensate the taxpayer for the assumption of risk it undertakes in providing continuing insurance coverage to the policyholders. A payment to assume risk in relation to a general insurance policy has a direct nexus or connection to the general insurance policy, and is considered to be an amount that is received by the company 'in respect of general insurance policies'.
Accordingly, the consideration received by the taxpayer is 'gross premiums ... in respect of general insurance policies' and assessable income under section 321-45 of the ITAA 1936.
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 Chapter 6 of the Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Bill 2010, there has been no change in meaning of the rewritten provisions.
Therefore, from 1 July 2010, all references to Section 321-45 of the ITAA 1936 should be read as referring to Section 321-45 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 321-45
section 995-1
section 321-45 Insurance Act 1973
the Act
Case References:
Technical Products Pty. Ltd. v. State Government Insurance Office (Q)
(1989) 167 CLR 45
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 2004/923
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