ATO ID 2004/923: Portfolio transfer of general insurance liabilities: deduction for payment of claims in respect of assumed outstanding claims liabilities
Date of decision: 1 November 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Can a general insurance company claim a deduction under section 321-25 of Schedule 2J to the Income Tax Assessment Act 1936 (ITAA 1936) for amounts paid directly relating to the settlement or discharge of claims arising from the assumption of an outstanding claims liability under a portfolio transfer?

Decision
Yes. A general insurance company claim a deduction under section 321-25 of the ITAA 1936 for amounts paid directly relating to the settlement or discharge of claims arising from the assumption of an outstanding claims liability 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 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 taxpayer subsequently pays an amount to settle or discharge a claim in respect of the assumed outstanding claims liability.

Reasons for decision
Summary: Section 321-25 of the ITAA 1936 provides that a general insurance company can deduct amounts paid during the year of income that are in respect of claims under general insurance policies. Amounts paid to settle or discharge claims arising from the assumption of an outstanding claims liability under a portfolio transfer are paid 'in respect of' claims under general insurance policies because the obligation to pay arises under the policies. The fact that the outstanding claims liability was not initially incurred by the taxpayer, but rather was assumed from the transferor, does not alter the outcome that the amounts are paid under a contract of insurance. Accordingly, the taxpayer is entitled to a deduction under section 321-25 of the ITAA 1936 for an amount paid directly relating to the settlement or discharge of claims arising from the assumption of an outstanding claims liability 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Application of this ATO ID from 1 July 2010: From 1 July 2010, the Tax Laws Amendment (Transfer of Provisions) Act 2010 repealed Schedule 2J of the ITAA 1936 and rewrote those provisions into Division 321 of the ITAA 1997.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 was slightly altered to adhere to the drafting approach taken in the ITAA 1997, but as outlined in the explanatory memorandum, there has been no change in meaning of the rewritten provisions. Therefore, from 1 July 2010, all references to Section 321-25 of the ITAA 1936 should be read as referring to section 321-25 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 section 321-25
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 2004/924 | 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