ATO ID 2004/924: Portfolio transfer of general insurance liabilities: amount received by taxpayer to assume unearned premium liability of a general insurance company
Date of decision: 1 November 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Is the amount of consideration received by a general insurance company from another general insurance company in respect of the unearned premium liability under general insurance policies transferred under a portfolio transfer assessable under section 321-45 of Schedule 2J to the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. The amount of consideration received by a general insurance company from another general insurance company in respect of the unearned premium liability under general insurance policies transferred under a portfolio transfer is assessable under section 321-45 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 (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 transferor paid an amount to the taxpayer in consideration for the taxpayer assuming the transferor's unexpired risk liability under general insurance policies. This is commonly referred to in the insurance industry as the unearned premium liability. The assumption of this liability obligates the taxpayer to provide insurance cover under policies of insurance the subject of the portfolio transfer for the balance of the term of the insurance contract period.

Reasons for decision
Summary: Section 321-45 of the ITAA 1936 includes in the assessable income of a general insurance company the gross premiums received or receivable during the income year in respect of general insurance policies. The words 'gross premium' are not defined under the ITAA 1936 or the ITAA 1997 but its commonly understood meaning is consideration for a contract of insurance or assurance. Similarly, the words 'in respect of' are not statutorily defined and their definition is obtained from case law. In Technical Products Pty Ltd v. State Government Insurance (Q) (1989) 167 CLR 45 the High Court interpreted the words 'in respect of' to: ... have a very wide meaning. Indeed, they have a chameleon-like quality in that they commonly reflect the context in which they appear...That nexus will not, however, exist unless there be some discernible and rational link... Under the portfolio transfer arrangement, the transferor is to pay an amount to the taxpayer equating to the accounting value of the unearned component of the original premiums received by the transferor under the policies of insurance. This payment is made to compensate the taxpayer for the assumption of risk it undertakes in providing continuing insurance coverage to the policyholders. A payment to assume risk in relation to a general insurance policy has a direct nexus or connection to the general insurance policy, and is considered to be an amount that is received by the company 'in respect of general insurance policies'. Accordingly, the consideration received by the taxpayer is 'gross premiums ... in respect of general insurance policies' and assessable income under section 321-45 of the ITAA 1936. | Detailed Reasoning - Application of this ATO ID from 1 July 2010: 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 was slightly 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 321-45 of the ITAA 1936 should be read as referring to Section 321-45 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 section 321-45
Case references: Technical Products Pty. Ltd. v. State Government Insurance Office (Q) (1989) 167 CLR 45
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 2004/916 | 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 2004/925 | 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