Portfolio transfer of general insurance liabilities: amount received by taxpayer to assume outstanding claims liability of a general insurance company

Is the amount of consideration received by a general insurance company from another general insurance company to assume an outstanding claims liability under general insurance policies under a portfolio transfer assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The amount of consideration received by a general insurance company from another general insurance company to assume an outstanding claims liability under general insurance policies under a portfolio transfer is assessable under section 6-5 of the ITAA 1997.

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 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 taxpayer received an amount from the transferor in consideration for the taxpayer assuming the transferor's outstanding claims liability under general insurance policies. The outstanding claims liability is the accounting value, being a proper and reasonable estimate of the present value of the sum of the taxpayer's liability for claims under its general insurance policies and direct settlement costs associated with those claims, increased by a margin for prudence.

Section 6-5 of the ITAA 1997 states that 'your income includes income according to ordinary concepts, which is called ordinary income.' The characterisation of the consideration received by the taxpayer will determine whether the amount is assessable under section 6-5 of the ITAA 1997.

In Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 63 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium) the High Court identified relevant factors to consider in characterising a receipt: Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business.

The decision in Myer Emporium demonstrates that an amount received by the taxpayer can be income even if it is a gain made otherwise than in the ordinary course of carrying on the taxpayer's business. Accordingly, an amount received in the context of a portfolio transfer may be assessable income, notwithstanding that the portfolio transfer may not be a transaction in the ordinary course of the taxpayer's business.

The payment received by the taxpayer in respect of the outstanding claims liability compensates the taxpayer for the assumption of the liability to pay the claims for which the transferor would otherwise have been liable. As a result of the portfolio transfer, the taxpayer is effectively put in the contractual position as if it were the original undertaker of risk under the insurance policies.

In G.P. International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 (Pipecoaters) it was also held that '...the scope of the business ...and ... the taxpayer's purpose in engaging in it' is the relevant factor to consider when characterising a receipt as assessable income.

Applying the Pipecoaters' decision to the portfolio transfer, the amount received in respect of the outstanding claims liability will be received in the course of the taxpayer's general insurance business which includes receiving compensation in return for assuming insurance risk.

Accordingly, the consideration paid to the taxpayer in respect of the outstanding claims liability to assume liabilities under general insurance policies from another general insurance company under the portfolio transfer is assessable income under section 6-5 of the ITAA 1997.