Issue
Will an amount paid by a general insurance company to another general insurance company under a portfolio transfer in respect of deferred acquisition costs constitute apportionable issue costs for the purposes of working out the net premiums of the general insurance company under section 321-60 of Schedule 2J to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. An amount paid by the general insurance company to another general insurance company under a portfolio transfer in respect of deferred acquisition costs constitutes apportionable issue costs for the purposes of working out the net premiums of the general insurance company under section 321-60 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 (ITA 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 transferor had previously incurred costs in the course of writing policies of general insurance, the subject of the portfolio transfer. Under the portfolio transfer the taxpayer compensates the transferor for part of those costs, referred to as deferred acquisition costs, by way of a payment to the transferor.
Reasons for Decision
Section 321-60 of the ITAA 1936 provides that the value of the unearned premium reserve is so much of the sum of the net premiums received or receivable by the company in relation to general insurance policies issued in the course of carrying on insurance business. Net premiums are defined in section 321-60 as the sum of gross premiums received or receivable and reinsurance commissions received and receivable less the sum of apportionable issue costs and any relevant reinsurance premiums.
Apportionable issue costs are defined in section 321-60 of the ITAA 1936 to include so much of the costs incurred by a general insurance company in connection with the issue of the relevant policies as relates to the gross premiums of the general insurance company, and includes: • commission and brokerage fees • administration costs of processing insurance proposals and renewals • administration costs of collecting premiums • selling and underwriting costs • fire brigade charges • stamp duty, and • other charges, levies and contributions imposed by government or governmental authorities that directly relate to general insurance policies.
When the taxpayer accepts the transferred portfolio, it pays valuable consideration to the transferor for the benefits associated with the apportionable issue costs that were incurred by the transferor.
Though the payment is made to the transferor it is nonetheless an expense which represents all or some of the components characterised as apportionable issue costs identified in section 321-60 of the ITAA 1936. There is no precondition that the costs be incurred by the insurance company that ultimately bears the risk under the policies. For costs to come within the definition of apportionable issue costs it is necessary that there be some relationship with the issue of the policies and derivation of gross premiums.
The amount paid by the taxpayer to the transferor in respect of deferred acquisition costs constitutes costs 'incurred by the company in connection with the issue of the relevant policies as relate to gross premiums' and as such will be classified as apportionable issue costs. The taxpayer will have incurred the amount credited to the transferor in respect of deferred acquisition costs. As the payment is a reimbursement of the issue costs incurred by the transferor, it is 'in connection with the issue of the relevant policies.'
Accordingly, for the purposes of determining the taxpayer's net premiums under section 321-60 of the ITAA 1936, the amount paid in respect of deferred acquisition costs will constitute apportionable issue costs.
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 and format was 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 321-60 of the ITAA 1936 should be read as referring to Section 321-60 of the ITAA 1997.