ATO Interpretative Decision
ATO ID 2004/914
Income Tax
Portfolio transfer of general insurance liabilities: consideration paid by taxpayer for assumption of unearned premium liabilityFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Can a general insurance company claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the consideration paid in respect of its unearned premium liability under a portfolio transfer?
Decision
Yes. A general insurance company can claim a deduction under section 8-1 of the ITAA 1997 for the consideration paid in respect of its unearned premium liability under a portfolio transfer.
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.
Under the portfolio transfer the taxpayer is required to pay the transferee consideration for assuming its unearned premium liability. The unearned premium liability is the accounting value of the gross premiums received or receivable by a general insurer that have not been recognised as earned at the time of the portfolio transfer.
Reasons for Decision
Section 8-1 of the ITAA 1997 states that a loss or outgoing is deductible provided that 'it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.' A loss or outgoing is not deductible under section 8-1 of the ITAA 1997 if it is denied under paragraph 8-1(2)(a) of the ITAA 1997 because it is a loss or outgoing of a capital nature.
In the case of the portfolio transfer, the payment in respect of the unearned premium liability is made so that the taxpayer's obligation to provide insurance cover to policyholders is met. The provision of insurance cover is a normal incident of an insurance company.
Applying the principle stated in G.P. International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1, the 'advantage sought by the making of the expenditure' is of a revenue nature as the payment is made to discharge an obligation that had arisen in the normal course of the taxpayer's insurance business.
Though a portfolio transfer may be undertaken in order to cease insurance operations of the taxpayer it is considered that authorities such as Modern Permanent Building and Investment Society (in liq) v. Federal Commissioner of Taxation (1958) 98 CLR 187; (1958) 11 ATD 438; (1958) 7 AITR 233 and Claire Douglas Peyton v. Federal Commissioner of Taxation (1963) 109 CLR 315; (1963) 13 ATD 133; (1963) 9 AITR 112 do not apply to characterise the payment as capital.
The High Court decision in Federal Commissioner of Taxation v. Foxwood (Tolga) Pty Ltd (1981) 147 CLR 278; 81 ATC 4261; (1981) 11 ATR 859 provides authority for the principle that particular expenditure which was incurred in context of a cessation of business may nevertheless be an allowable deduction where it would have been incurred on revenue account if had it been made in the ordinary course of business.
In the context of subsection 51(1) of the Income Tax Assessment Act 1936, the predecessor of section 8-1 of the ITAA 1997, Hill J said in FC of T v. Broken Hill Pty Ltd Company Ltd 2000 ATC 4659; (2000) 45 ATR 507; [2000] FCA 1431:
In determining whether an outgoing falls for deductibility under s51(1), it will be critical to determine what the outgoing is paid for. The significance of that question, which is directed to ascertaining the advantage sought to be obtained, is essential to the determination of true characterisation of an outgoing.
In the present circumstances, whilst the payment is made against the backdrop of the cessation of the taxpayer's insurance business, the purpose of the expenditure is to discharge the taxpayer's obligation to provide risk cover as required under the insurance contracts.
Thus, even though the portfolio transfer was not in the normal course of the taxpayer's business, the amount paid to the transferee will be deductible as it discharges the taxpayer's obligation to provide risk cover under insurance contracts that were entered into in the normal course of its business.
Accordingly, the amount the taxpayer paid to the transferee in the portfolio transfer in respect of the unearned premium liability is deductible under section 8-1 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 8-1
paragraph 8-1(2)(a)
section 995-1
subsection 51(1) Insurance Act 1973
the Act
Case References:
Modern Permanent Building and Investment Society (In Liquidation) v. Federal Commissioner of Taxation
(1958) 98 CLR 187
(1958) 11 ATD 438
(1958) 7 AITR 233
(1963) 109 CLR 315
(1963)13 ATD 133
(1963) 9 AITR 112 G P International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation
(1990) 170 CLR 124
90 ATC 4413
(1990) 21 ATR1 FC of T v. Broken Hill Pty Co Ltd
2000 ATC 4659
45 ATR 507 Federal Commissioner of Taxation v. Foxwood (Tolga) Pty Ltd
(1981) 147 CLR 278
81 ATC 4261
11 ATR 859 Related ATO Interpretative Decisions
ATO ID 2004/910
ATO ID 2004/911
ATO ID 2004/912
ATO ID 2004/913
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 2004/924
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