ATO ID 2004/913: Portfolio transfer of general insurance liabilities: outstanding claims liability of 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 outstanding claims liability of a general insurance company, determined under section 321-20 of Schedule 2J to the Income Tax Assessment Act 1936 (ITAA 1936) at the end of a year of income, include a value in respect of liabilities that have been assumed by another general insurance company under a portfolio transfer?

Decision
No. The outstanding claims liability of a general insurance company, determined under section 321-20 of the ITAA 1936 at the end of a year of income, does not include a value in respect of liabilities that have been assumed by another general insurance company under a portfolio transfer.

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. Under the portfolio transfer, the taxpayer is required to give consideration to the transferee for assuming the outstanding claims liability under its general insurance policies.

Reasons for decision
Summary: The value of the outstanding claims liability represents, as provided for by section 321-20 of the ITAA 1936, the sum of the amounts that it is appropriate for an insurance company to set aside and invest so that the company can meet its: The effect of the transfer of the taxpayer's outstanding claims liability is to discharge its contractual liabilities to policyholders under the general insurance policies by requiring the transferee to meet those liabilities. After the completion of the portfolio transfer, the policyholder will seek to recover under the policy of insurance from the transferee. There will be no requirement for the taxpayer to set aside and invest amounts to meet liabilities for outstanding claims that are the subject of the transfer. Therefore, the 'value of outstanding claims liabilities' for the purposes of section 321-20 of the ITAA 1936 will exclude the value of the liabilities transferred. Accordingly, the outstanding claims liability of the taxpayer under section 321-20 of the ITAA 1936 at the end of a year of income will not include an amount in respect of liabilities that have been assumed by another general insurance company under a portfolio transfer. | 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 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. Section 321-20 of the ITAA 1997 has, however, been clarified to include reference to section 148(1) of the ITAA 1936, which relates to reinsurance with non-residents. Therefore, from 1 July 2010, all references to Section 321-20 of the ITAA 1936 should be read as referring to Section 321-20 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 section 321-20 section 148(1)
Related ATO interpretative decisions: ATO ID 2004/910 | ATO ID 2004/911 | ATO ID 2004/912 | 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 2004/924 | 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