Senate

Revised Explanatory Memorandum

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

Chapter 4 - General insurance

Outline of chapter

4.1 Schedule 2 to this bill amends the ITAA 1936 affecting general insurance companies to ensure that:

•

the provision for outstanding claims is worked out on a present value basis; and

•

gross premium income is included in assessable income in the year it is received or receivable and net premium income that relates to risk exposure in subsequent years is appropriately deferred.

4.2 The Schedule also amends the ITAA 1936 to ensure that the provision for outstanding claims of self insurers in respect of workers' compensation liabilities is taxed consistently with the provision for outstanding claims of general insurance companies.

Context of amendments

4.3 The basic principles for taxing general insurance companies are outlined in Taxation Ruling IT 2663. The Ruling, which was agreed to by the general insurance industry, applies to the general insurance activities of general insurance companies from the 1991-1992 income year. The same principles have been extended to the reinsurance activities of general insurance companies from the 1995-1996 income year (Taxation Ruling TR 95/5) and to self insurers from the 1996-1997 income year (Taxation Determination TD 97/14).

4.4 A key principle of Taxation Ruling IT 2663 relates to the methodology for working out the amount that general insurance companies can deduct for outstanding claims - that is, claims that a company is liable to pay arising from an insured event that occurred in the year or earlier years but have not been paid in full at the end of the income year.

4.5 The Ruling states that the amount of the deduction in the current income year should be, broadly, the present value of the estimated amount needed to pay out those claims in the future. This methodology is consistent with the methodology used to determine outstanding claims for accounting purposes and was accepted by the general insurance industry as being appropriate for income tax purposes.

4.6 However, the use of this methodology for income tax purposes was challenged in Federal Commissioner of Taxation v Mercantile Mutual Insurance ( Workers Compensation) Ltd & Anor
99 ATC 4404 (the Mercantile Mutual case). The Court concluded that the income tax law allows a deduction in the current income year for, broadly, the nominal future value of outstanding claims - that is, the nominal amount that is estimated to be paid out in the future rather than the present value of that amount that the company actually sets aside today.

4.7 Taxation Ruling IT 2663 also specifies the methodology general insurance companies should use to spread premium income. The Ruling requires general insurance companies to spread net premiums over the relevant period of risk. The net premiums approach effectively spreads the deduction for expenses directly related to the gross premiums over the relevant period of risk and is consistent with the outcome achieved by the accounting standard that applies to general insurance companies (i.e. Accounting Standard AASB 1023).

Summary of new law

4.8 Schedule 2 to this bill amends the ITAA 1936 so that, consistent with the methodology used for accounting purposes and with the long standing view of the income tax law expressed in Taxation Ruling IT 2663:

•

the provision for outstanding claims of general insurance companies is worked out on a present value basis:

-

increases in the value of the provision for outstanding claims over the income year are allowed as a deduction; and

-

decreases in the value of the provision for outstanding claims over the income year are included in assessable income; and

•

gross premium income is included in assessable income in the year it is received or receivable. Net premium income that relates to risk exposure in subsequent years is allocated to the unearned premium reserve. The value of the unearned premium reserve at the end of the income year is compared with the value of that reserve at the end of the previous income year:

-

increases in the value of the unearned premium reserve over the income year are allowed as a deduction - this ensures that net premiums that relate to risk exposure in subsequent years is appropriately deferred; and

-

decreases in the value of the unearned premium reserve over the income year are included in assessable income - this ensures that net premiums that relate to risk exposure in the current year are included in assessable income.

4.9 The Schedule also amends the ITAA 1936 to ensure that the provision for outstanding claims of self insurers in respect of workers' compensation liabilities is taxed consistently with the provision for outstanding claims of general insurance companies.

Detailed explanation of new law

4.10 This bill inserts Division 321 into Schedule 2J to the ITAA 1936. Division 321 deals with specific issues relating to the taxation of general insurance companies. [Schedule 2, item 9, section 321-1]

4.11 In particular, Division 321 outlines:

•

the taxation treatment of claims under general insurance policies; and

•

the basis of apportioning premium income by general insurance companies.

4.12 The term general insurance company is defined to mean a body corporate that carries on insurance business. [Schedule 2, items 1 and 10, subsection 6(1) of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997]

4.13 Insurance business is defined to have the same meaning as it has in the Insurance Act 1973 . [Schedule 2, items 3 and 11, subsection 6(1) of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997]

4.14 The Insurance Act 1973 defines insurance business to mean, broadly, the business of undertaking liability, by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, and includes any business incidental to insurance business.

4.15 Therefore, the new Division applies to:

•

companies that are authorised under the Insurance Act 1973 to carry on insurance business; and

•

other companies that carry on insurance business but are not required to be authorised under the Insurance Act 1973 - such as companies that are licensed under the Workers Compensation Act 1987 (NSW).

4.16 A general insurance policy has the same meaning as in the ITAA 1997. A general insurance policy is defined in subsection 995-1(1) of the ITAA 1997 to mean a policy of insurance that is not a life insurance policy or an annuity instrument. [Schedule 2, item 2, subsection 6(1)]

Claims under general insurance policies

4.17 This bill inserts Subdivision 321-A into Schedule 2J. Subdivision 321-A:

•

outlines the taxation treatment of the provision for outstanding claims of general insurance companies; and

•

allows a deduction for amounts paid during the income year in respect of claims under general insurance policies.

[Schedule 2, item 9, section 321-5]

What are outstanding claims?

4.18 Outstanding claims under general insurance policies at the end of an income year are claims that a general insurance company is liable to pay in relation to an insured event that occurred in the year or earlier years but have not been paid in full. That is, outstanding claims are:

•

claims arising from an insured event that occurred in the income year or earlier income years which have been reported to the insurer but have not been paid in full at the end of the income year;

•

claims incurred but not yet reported - that is, claims arising from an insured event that occurred in the income year for which the insurer is presently liable to pay but which have not yet been reported to the insurer at the end of the income year; and

•

claims incurred but not enough reported to the insurer at the end of the income year.

[Schedule 2, items 4 and 12, subsection 6(1) of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997]

Example 4.1

Rachael had a motor vehicle accident in May. The motor vehicle was covered by a general insurance policy with the Jasper Insurance Company. Rachael immediately reported the claim to Jasper Insurance. However, the claim was not paid until the following income year. Therefore, the claim is an outstanding claim at the end of the income year because it was reported to Jasper Insurance in the current income year but not paid until a later income year.

Example 4.2

Christopher had a motor vehicle accident in June and was also covered by a general insurance policy with the Jasper Insurance Company. However, Christopher did not report the accident to Jasper Insurance until the following income year. Even though the claim has not been reported before the end of the income year, Jasper Insurance can estimate on the basis of probabilities that a claim has been incurred. Therefore, the claim was an outstanding claim at the end of the income year because it was incurred in the current income year but not reported to Jasper Insurance until a later income year.

What is the value of the outstanding claims liability?

4.19 The value of the outstanding claims liability at the end of the income year is:

the amount that the company determines, based on proper and reasonable estimates, to be appropriate to set aside which, when invested, will provide sufficient funds to pay the liabilities for outstanding claims plus any direct settlement costs associated with those outstanding claims

less

any part of that amount that the company expects to recover in respect of those claims.

[Schedule 2, items 5 and 9, subsection 6(1) and section 321-20]

4.20 The amount that the company determines, based on proper and reasonable estimates, to be appropriate to set aside which, when invested, will provide sufficient funds to pay the liabilities for outstanding claims plus any direct settlement costs associated with those outstanding claims essentially represents the present value of the outstanding claims liability and the direct settlement costs associated with those outstanding claims.

4.21 In working out the present value of the outstanding claims liability and the direct settlement costs associated with those outstanding claims, a general insurance company can take into account the expected cost of the following factors:

•

direct policy costs - that is, amounts to be paid to the claimant or third party under the policy, medical and hospital fees payable under the policy and any other amounts payable as a condition of the policy;

•

claim investigation and assessment costs - that is, investigation fees, legal fees and claim assessment costs;

•

direct claim settlement expenditures - that is, direct costs attributable to a particular claim; and

•

estimated increased costs of litigation and other direct costs - that is, essentially, trends in claims pay-out experience.

4.22 In the case of short-tail business - that is, general insurance policies under which claims are usually settled within 12 months of the insured event that gives rise to the claim occurring - the present value of the outstanding claims liability is usually the nominal value of that liability.

4.23 Generally, a general insurance company's determination of the present value of the outstanding claims liability and the direct settlement costs associated with those outstanding claims will be accepted as being based on proper and reasonable estimates if a qualified actuary estimates the company's expected final claims liability and calculates the amount that the company needs to set aside in the current year to yield a sufficient amount to meet that liability in the future.

4.24 However, the actuary's determination of the provision is not acceptable for income tax purposes if strong evidence exists to suggest that the actuary's estimate is incorrect. For example, the actuary's determination would not be acceptable if the underlying assumptions on which estimates are based for several years have proved to be consistently incorrect and that fact is not adequately reflected in estimates made in later years.

4.25 Estimates made by people other than actuaries need to be well documented to enable the estimates to be substantiated. The documentation must include the steps used in the estimation process, the factors taken into account in making the estimate and the reasons for the estimate. The company needs to be able, if required, to substantiate the estimate. The credentials of the person selected to make the estimate need to be commensurate with the competence needed for the task.

Prudential margins

4.26 General insurance companies determine the value for the outstanding claims liability on the basis of a 'best' or 'central' estimate (i.e. an estimate with 50% probability of adequacy). The company may decide to hold a provision higher than the best estimate to provide levels of adequacy above 50% - that is, a margin for prudence. The company decides the level of the margin for prudence which it considers to be appropriate for its business based on its experience and actuarial advice.

4.27 Therefore, the amount that the company determines to be appropriate to set aside which, when invested, will provide sufficient funds to pay the liabilities for outstanding claims in the future may include an appropriate margin for prudence. However, the amount of the prudential margin, and how the level of the margin is determined, needs to be well documented. The company's decision on the level of the prudential margin needs to reflect the company's business experience and be made for sound commercial or business reasons and not for income tax purposes.

Indirect settlement costs

4.28 Indirect settlement costs, such as general expenses of running and administering a general insurance company's claims department (i.e. claims handling costs), do not attach to individual claims and are not taken into account in determining the value of the outstanding claims liability.

Amounts expected to be recovered in respect of outstanding claims

4.29 The amount that represents the present value of the liabilities for outstanding claims and direct settlement costs is reduced by the present value of the amount that the company expects to recover in respect of outstanding claims to determine the value of the outstanding claims liability.

4.30 Amounts that the company expects to recover in respect of outstanding claims include:

•

reinsurance recoveries;

•

insurance contributions fund entitlements;

•

supplemental fund entitlements;

•

contribution entitlements from other insurers;

•

policy excesses; and

•

salvage and subrogation.

Example 4.3

Amy has a motor vehicle accident in 2002. The motor vehicle was covered by a general insurance policy with the Jasper Insurance Company. Jasper Insurance estimates that it will have to pay out a nominal amount of $20,000 to Amy for litigation and personal injury claims in 2007. The present value of that amount is $16,000. Jasper Insurance has directly covered $5,000 of the expected $20,000 pay out and the remainder (i.e. $15,000) is covered by a reinsurance policy with the Major Reinsurance Company. The present value of the expected reinsurance recovery of $15,000 is $12,000.

Jasper Insurance's outstanding claims liability is the present value of the nominal amount expected to be paid out to Amy reduced by the present value of the expected reinsurance recoveries from Major Reinsurance. Therefore, the value of Jasper Insurance's outstanding claims liability at the end of the income year in respect of the claim is $4,000 (i.e. $16,000 - $12,000).

What is the impact of changes in the value of the outstanding claims liability over an income year?

4.31 The value of a general insurance company's outstanding claims liability will fluctuate over time because the company will:

•

incur new claims from year to year;

•

review the value of its outstanding claims for previous years having regard to inflationary factors and trends in court awards; and

•

pay out claims previously included in the outstanding claims provision.

4.32 The value of the outstanding claims liability on general insurance policies at the end of an income year is compared with the value of that liability at the end of the previous income year:

•

the amount of any reduction in the value of the outstanding claims liability over the income year is included in assessable income; and

•

the amount of any increase in the value of the outstanding claims liability over the income year is allowed as a deduction.

[Schedule 2, item 9, sections 321-10 and 321-15]

Example 4.4

The value of Jasper Insurance Company's outstanding claims liability is:

•

$225 million at the end of the 2000-2001 income year; and

•

$260 million at the end of the 2001-2002 income year.

Therefore, as the value of the outstanding claims liability has increased over the income year, Jasper Insurance is entitled to a deduction for the amount of that increase ($35 million) in the 2001-2002 income year.

Claims paid are deductible

4.33 A specific deduction is allowed for claims paid under general insurance policies during the year of income by a general insurance company. [Schedule 2, item 9, section 321-25]

Apportionment of premium income

4.34 A general insurance policy typically straddles 2 or more income years. Therefore, the premium income needs to be apportioned over the risk period for income tax purposes into the income years in which it is derived.

4.35 This bill inserts Subdivision 321-B into Schedule 2J. Subdivision 321-B outlines the basis that must be used by general insurance companies to spread premium income over relevant income years. [Schedule 2, item 9, section 321-40]

4.36 Gross premium income is included in assessable income in the year it is received or receivable. Net premium income that relates to risk exposure in subsequent years is allocated to the unearned premium reserve. The value of the unearned premium reserve at the end of the income year is compared with the value of that reserve at the end of the previous income year:

•

increases in the value of the unearned premium reserve over the income year are allowed as a deduction - this ensures that net premiums that relate to risk exposure in subsequent years is appropriately deferred; and

•

decreases in the value of the unearned premium reserve over the income year are included in assessable income - this ensures that net premiums that relate to risk exposure in the current year are included in assessable income.

4.37 The net premiums approach, which is consistent with the methodology used for accounting purposes, effectively spreads the deduction for expenses directly related to the gross premiums (i.e. certain reinsurance premiums and acquisition costs) over the relevant period of risk.

What is the value of the unearned premium reserve?

4.38 The value of a general insurance company's unearned premium reserve at the end of the income year in relation to general insurance policies issued in the course of carrying on insurance business is the sum of the net premiums received or receivable by the company in relation to those policies that the company determines, based on proper and reasonable estimates, to relate to risks covered by the policies in respect of later years of income. [Schedule 2, items 7 and 9, subsection 6(1) and section 321-60]

4.39 The amount that the company determines, based on proper and reasonable estimates, to relate to risks covered by the policies in respect of later years of income will generally be determined by comparing the number of days of risk coverage in a particular income year with the total period of risk covered by the policy.

Example 4.5

Blake takes out a motor vehicle policy with the Jasper Insurance Company on 1 April 2002 and pays a premium of $4,000. The policy expires on 31 March 2003. Therefore, 91 days of risk coverage under the policy occurs in the 2001-2002 income year and 274 days of risk coverage occurs in the 2002-2003 income year. The net premium (i.e. the gross premium less acquisition costs and reinsurance premiums) received by Jasper Insurance in relation to the policy is $3,500.

Therefore, the amount of the net premium received by Jasper Insurance that relates to risk coverage in the 2002-2003 income year is $2,627 (i.e. $3,500 274/365). Consequently, $2,627 is included in the value of the unearned premium reserve at the end of the 2001-2002 income year.

4.40 The terms of a general insurance policy may specify for a single, up-front premium to be paid in respect of a period of risk extending over several years. This situation typically arises, for example, in the case of mortgage insurance policies and credit insurance policies. In these circumstances, the value of the unearned premium reserve at the end of each year reduces over the period of risk. Consequently, net premium income is effectively spread over the relevant period of risk.

Example 4.6

Sam borrows money to buy a car and is required by the lender to take out credit insurance. Sam pays a premium of $200 to the Jasper Insurance Company to cover the 5 year term of the loan.

Jasper Insurance incurs $30 in acquisition costs and pays out $50 in relevant reinsurance premiums. Therefore, Jasper Insurance receives net premium income of $120.

The amount of net premium income that Jasper Insurance determines, based on experience in previous years, to relate to risk exposure in subsequent years is allocated to the unearned premium reserve. Therefore, assuming that Jasper Insurance determines the risk exposure in each year of the policy to be same, the value of Jasper Insurance's unearned premium reserve and the premium earned each year will be the amount set out in Table 4.1.

Table 4.1

Year	1	2	3	4	5
Value of unearned premium reserve	$96	$72	$48	$24	0
Premium earned	$104*	$24	$24	$24	$24

* Gross premiums ($200) less increase in the value of the unearned premium reserve ($96). Acquisition costs ($30) and reinsurance premiums ($50) are deducted from this amount to determine taxable income ($24).

4.41 Under some general insurance policies the incidence of the pattern of risk is not uniform over the period of the policy. Examples of general insurance policies that typically have an uneven spread of the incidence of risk include:

•

mortgage protection insurance policies;

•

credit insurance policies;

•

crop insurance policies; and

•

some forms of construction insurance policies.

4.42 In relation to these policies, the amount that the company determines, based on proper and reasonable estimates, to relate to risks covered by the policies in respect of later years of income will generally be based on the pattern of the incidence of risk as determined by a qualified actuary or a suitably competent person.

Net premiums

4.43 Net premiums are the sum of:

gross premiums received or receivable by the company in relation to the relevant policies during the current income year or in an earlier income year

plus

reinsurance commissions received or receivable by the company that relate to relevant reinsurance premiums

less

apportionable issue costs incurred by the company

less

relevant reinsurance premiums paid by the company.

[Schedule 2, item 9, definition of 'net premiums' in section 321-60]

Gross premiums

4.44 Section 321-45 specifically includes the gross premiums received or receivable in respect of general insurance polices during the income year in the assessable income of a general insurance company. [Schedule 2, item 9, section 321-45]

Reinsurance commissions

4.45 Reinsurance commissions received or receivable by a general insurance company are included in assessable income under section 6-5 of the ITAA 1997.

4.46 A reinsurance company may pay reinsurance commissions to a general insurance company. Reinsurance commissions are based on the reinsurance premiums payable by the general insurance company to the reinsurer. Most reinsurance commissions represent a reimbursement to the general insurance company for part of the apportionable issue costs of the policies that are the subject of the reinsurance arrangements. They also represent a contribution towards the cost of management of those policies. Effectively, the commissions result in the sharing of policy acquisition and management costs between the general insurance company and the reinsurance company.

4.47 Consequently, reinsurance commissions received or receivable that relate to relevant reinsurance premiums are included in the calculation of net premium income.

Apportionable issue costs

4.48 Apportionable issue costs, which are commonly referred to by the general insurance industry as acquisition costs, are generally deductible under section 8-1 of the ITAA 1997.

4.49 The net premiums methodology effectively spreads the deduction for expenses directly related to the gross premiums over the period to which the policy relates. Therefore, the gross premiums are reduced by apportionable issue costs to determine net premiums. The effect is to spread the deduction for apportionable issue costs over the same period as the related gross premium income of the company.

4.50 Apportionable issue costs are costs incurred by the company in connection with the issue of the relevant policies that relate to gross premiums and include:

•

commission and brokerage fees;

•

administration costs of processing insurance proposals and renewals;

•

administration costs of collecting premiums;

•

selling and underwriting costs (such costs as risk assessment and advertising);

•

fire brigade charges;

•

stamp duty; and

•

other charges, levies or contributions imposed by Commonwealth or State governments, or by government authorities, that directly relate to general insurance policies.

[Schedule 2, item 9, definition of 'apportionable issue costs' in section 321-60]

4.51 The effect of including apportionable issue costs in the determination of net premiums is to spread the deduction over the period to which the policy relates. Therefore, the general prepayment provisions do not apply to apportionable issue costs. [Schedule 2, item 8, paragraph (e) of the definition of 'excluded expenditure' in subsection 82KZL(1)]

Relevant reinsurance premiums

4.52 Reinsurance premiums paid by a general insurance company are generally deductible under section 8-1 of the ITAA 1997.

4.53 The net premiums methodology effectively spreads the deduction for expenses directly related to gross premiums over the period to which the policy relates. Therefore, the gross premiums are also reduced by certain reinsurance premiums (relevant reinsurance premiums) paid during the current income year or in an earlier income year for the reinsurance of risks covered by the relevant policies to determine net premiums. The effect is to spread the deduction for relevant reinsurance premiums over the same period as the related gross premium income.

4.54 As the effect of including relevant reinsurance premiums in the determination of net premiums is to spread the deduction over the period to which the policy relates, the general prepayment provisions do not apply to relevant reinsurance premiums. [Schedule 2, item 8, paragraph (f) of the definition of 'excluded expenditure' in subsection 82KZL(1)]

4.55 Relevant reinsurance premiums are reinsurance premiums paid by the company other than:

•

reinsurance premiums that the company cannot deduct because of the application of subsection 148(1) of the ITAA 1936; and

•

treaty non-proportional reinsurance premiums.

[Schedule 2, item 9, definition of 'relevant reinsurance premiums' in section 321-60]

4.56 Subsection 148(1) of the ITAA 1936:

•

denies an income tax deduction to an Australian insurer for reinsurance premiums paid to a non-resident reinsurer; and

•

excludes any amounts recovered by the Australian insurer from the non-resident reinsurer for a loss on any reinsured risk from the assessable income of the Australian insurer.

4.57 Subsection 148(2) allows the Australian insurer to make an election which effectively changes this outcome.

4.58 If subsection 148(1) applies to deny an income tax deduction to an Australian insurer for reinsurance premiums paid to a non-resident reinsurer, then those reinsurance premiums are not relevant reinsurance premiums.

4.59 Treaty non-proportional reinsurance premiums are reinsurance premiums for a class of general insurance policy business where, under the contract for reinsurance, the reinsurer agrees to pay in respect of a loss incurred by the company that is covered by the relevant policy, some or all of the excess over an agreed amount - that is, the reinsurance payable is not in the same proportion as the reinsurance premium received. [Schedule 2, item 9, definition of 'treaty non-proportional reinsurance premiums' in section 321-60]

4.60 Treaty non-proportional reinsurance premiums reduce the overall risk exposure of a general insurer but are not related to any particular premium. These reinsurance premiums are more in the nature of a direct expense applicable to the whole period of the reinsurance cover. Therefore, treaty non-proportional reinsurance premiums are not relevant reinsurance premiums. Consequently, the deduction for treaty non-proportional reinsurance premiums is spread over income years by applying the general prepayment provisions rather than the net premiums methodology.

What is the impact of changes in the value of the unearned premium reserve over an income year?

4.61 The value of a general insurance company's unearned premium reserve will fluctuate from year to year. Consequently, the value of the unearned premium reserve at the end of an income year is compared with the value of that reserve at the end of the previous income year:

•

the amount of any reduction in the value of the unearned premium reserve over the income year is included in assessable income; and

•

the amount of any increase in the value of the unearned premium reserve over the income year is allowed as a deduction.

[Schedule 2, item 9, sections 321-50 and 321-55]

Example 4.7

The value of Jasper Insurance Company's unearned premium reserve is:

•

$165 million at the end of the 2000-2001 income year; and

•

$150 million at the end of the 2001-2002 income year.

Therefore, as the value of the unearned premium reserve has decreased over the income year, the amount of that decrease ($15 million) is included in Jasper Insurance's assessable income in the 2001-2002 income year.

Self insurers

4.62 This bill also inserts Division 323 into Schedule 2J of the ITAA 1936. Division 323 outlines the taxation treatment of outstanding claims for workers' compensation liabilities of companies that are not required by law to insure, and do not insure, in respect of such liabilities - that is, self insurers. [Schedule 2, item 9, section 323-1]

4.63 Under certain State and Territory legislation some employers are permitted to retain a particular amount of their workers' compensation liabilities and, in that sense, are said to be self insurers of their workers' compensation liabilities.

4.64 The amendments ensure that the taxation treatment of outstanding claims for self insurers in respect of workers' compensation liabilities is consistent with the taxation treatment of outstanding claims for general insurance companies.

4.65 That is, self insurers are required to compare the value of the outstanding claims liability for workers' compensation claims at the end of an income year with the value of that liability at the end of the previous income year:

•

the amount of any reduction in the value of the outstanding claims liability over the income year is included in assessable income; and

•

the amount of any increase in the value of the outstanding claims liability over the income year is allowed as a deduction.

[Schedule 2, item 9, sections 323-5 and 323-10]

4.66 The value of the outstanding claims liability at the end of the income year for workers' compensation claims is the amount that the self insurer determines, based on proper and reasonable estimates, to be appropriate to set aside which, when invested, will provide sufficient funds to pay the liabilities for outstanding claims plus any direct settlement costs associated with those outstanding claims - that is, the present value of those liabilities. [Schedule 2, items 6 and 9, subsection 6(1) and section 323-15]

4.67 A self insurer can deduct amounts paid during the income year in respect of workers' compensation claims. [Schedule 2, item 9, section 323-20]

Application and transitional provisions

Claims under general insurance policies

General insurance activities

4.68 The amendments relating to claims under general insurance policies apply to assessments in respect of the general insurance activities of general insurance companies for the 1991-1992 income year (i.e., the date of effect of Taxation Ruling IT 2663) and subsequent income years. [Schedule 2, item 9, subsection 321-30(1)]

4.69 The amendments confirm the long standing view of the law outlined in Taxation Ruling IT 2663 which was agreed to by the general insurance industry. The amendments apply from the 1991-1992 income year in order to protect a substantial amount of revenue that would otherwise be at risk.

4.70 However, as a transitional measure, consistent with Taxation Ruling IT 2663, the opening balance of the outstanding claims liability in relation to general insurance activities for the 1991-1992 income year is the present value of the outstanding claims liability as at that time rather than the closing balance used by the company for tax purposes in the 1990-1991 income year. [Schedule 2, item 9, subsections 321-30(2) and (3)]

Reinsurance activities

4.71 The amendments relating to claims under general insurance policies apply to assessments in respect of the reinsurance activities of general insurance companies from the 1995-1996 income year (i.e., the date of effect of Taxation Ruling TR 95/5) and subsequent income years. [Schedule 2, item 9, subsection 321-35(1)]

4.72 However, as a transitional measure, consistent with Taxation Ruling TR 95/5, the opening balance of the outstanding claims liability in relation to reinsurance activities for the 1995-1996 income year is the present value of the outstanding claims liability as at that time rather than the closing balance used by the company for tax purposes in the 1994-1995 income year. [Schedule 2, item 9, subsections 321-35(2) and (3)]

Apportionment of premium income

4.73 The amendments relating to the apportionment of the premium income of general insurance companies apply to assessments in respect of the 1999-2000 income year and subsequent income years. [Schedule 2, item 9, section 321-65]

4.74 The amendments confirm the long standing view of the law outlined in Taxation Ruling IT 2663 and overcome difficulties with the interaction between the prepayment provisions and the principles used by general insurance companies to apportion premium income.

Self insurers

4.75 The amendments relating to self insurers apply to assessments in respect of the 1996-1997 income year (i.e., the date of effect of Taxation Determination TD 97/14) and subsequent income years. [Schedule 2, item 9, section 323-25]

Consequential amendments

4.76 Section 10-5 of the ITAA 1997 contains a checklist of assessable income to assist users of the legislation to find specific items. Section 12-5 contains a similar checklist of allowable deductions. The checklists in section 10-5 and section 12-5 are updated to include appropriate references to the new provisions. [Schedule 2, items 9A and 9B, sections 10-5 and 12-5]