ATO ID 2004/916: Portfolio transfer of general insurance liabilities: value of unearned premium reserve of a general insurance company that transfers its liabilities under a portfolio transfer
Date of decision: 1 November 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Does the value of the unearned premium reserve of a general insurance company under section 321-60 of Schedule 2J to the Income Tax Assessment Act 1936 (ITAA 1936) include an amount in relation to risks covered by policies where, under a portfolio transfer, another general insurance company has assumed responsibility to provide the risk cover under the policies?

Decision
No. The value of the unearned premium reserve of a general insurance company under section 321-60 of the ITAA 1936 does not include an amount in relation to risks covered by policies where, under a portfolio transfer, another general insurance company has assumed responsibility to provide the risk cover under the policies.

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 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 completed in accordance with the provisions of the Insurance Act. The transferee is also an authorised general insurer under the Insurance Act. Prior to the portfolio transfer, the taxpayer has an obligation to provide insurance cover for the period stipulated in the policies of insurance that it has issued. Under the portfolio transfer, the obligation that remains under the policies of insurance for the unexpired risk period is assumed by the transferee. The taxpayer then has no ongoing obligation to provide insurance cover under the policies.

Reasons for decision
Summary: Section 321-60 of the ITAA 1936 defines the value of the unearned premium reserve as the 'net premiums received or receivable by the company in relation to those policies as the company determines, based on proper and reasonable estimates, to relate to risks covered by the policies in respect of later years of income.' The value of the unearned premium reserve is therefore limited to the risk covered by a taxpayer under the policies in subsequent income years. The effect of the portfolio transfer is that the taxpayer no longer has an obligation to provide insurance cover under the policies. Accordingly, none of the net premiums received or receivable by the taxpayer in relation to the policies would relate to risks covered by the taxpayer under the policies. Where a general insurance company ceases to conduct insurance business after a portfolio transfer a proper and reasonable estimate of the unearned premium reserve at the end of the income year would therefore be nil because the obligation to provide insurance cover under the policies is assumed by the transferee. Accordingly, the value of the unearned premium reserve of the taxpayer under section 321-60 of the ITAA 1936 would not include an amount in relation to risks covered by policies where, under a portfolio transfer, another general insurance company has assumed responsibility to provide the risk cover provided under the policies. 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.

Legislative references: Income Tax Assessment Act 1936 section 321-60
Related ATO interpretative decisions: 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 2004/917 | 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
Other references: Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Bill 2010
Subject references: General insurance General insurance industry