ATO ID 2002/201: Deduction for increase in value of liabilities under net risk components of ordinary endowment policies issued by a friendly society
Date of decision: 27 August 2001
Year of income: Year ended 30 June 2001 and subsequent income years
Business line: Public Groups and International

Issue
How is the increase in value of liabilities under net risk components of ordinary endowment policies issued by a friendly society determined?

Decision
The increase in value of liabilities under net risk components of ordinary endowment policies issued by a friendly society is determined under subsection 320-85(4) of the Income Tax Assessment Act 1997 (ITAA 1997). The amount allowed as a deduction to a friendly society is the sum of the policy liabilities (as defined in the Valuation Standard), as calculated by an actuary in respect of the net risk component of policies less the sum of any cumulative losses for the net risk component of policies.

Facts
A friendly society issues bundled ordinary endowment policies.

Reasons for decision
Summary: Section 320-85 of the ITAA 1997 allows a deduction for increases in the value of liabilities under the net risk component of policies over an income year. If there is a decrease in the value of the policies under the net risk component of policies over the income year, the decrease is included in the assessable income of the friendly society under paragraph 320-15(h) of the ITAA 1997. The increase in value of liabilities under net risk components of ordinary endowment policies issued by friendly society is determined under subsection 320-85(4) of the ITAA 1997. The amount allowed as a deduction is the sum of the policy liabilities (as defined in the Valuation Standard), as calculated by an actuary in respect of the net risk component of policies less the sum of any cumulative losses for the net risk component of policies. To calculate the "net risk component" ( as defined in subsection 995-1(1) of the ITAA 1997) of the policy liabilities, the actuary of a friendly society would have regard to the current termination value, and may adopt a pragmatic approach using reasonable assumptions. The actuary could for example, take into consideration the method used in paragraph 320-55(3)(b)(ii) of the ITAA 1997 to calculate the risk component.

Legislative references: Income Tax Assessment Act 1997 Section 320-85 Subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2002/197 | ATO ID 2002/198 | ATO ID 2002/199 | ATO ID 2002/200
Subject references: Life assurance Endowment insurance