ATO ID 2002/586: Does adding an additional investment option to a policy constitute a new policy?
Date of decision: 26 February 2002
Year of income: 2002 and subsequent income years
Business line: Public Groups and International

Issue
Is a life insurance company entitled to an exemption under section 320-40 of the Income Tax Assessment Act 1997 ('ITAA 1997') if, after 30 June 2000 it changes the terms and conditions of the policy to add an additional investment option?

Decision
Yes. A life insurance company is entitled to an exemption under section 320-40 of the ITAA 1997 if, after 30 June 2000 it changes the terms and conditions of the policy to add an additional investment option.

Facts
A life insurance policy was entered into before 1 July 2000. The following change was made to the terms and conditions of that policy after 30 June 2000: There was no change made to the fee structure of the policy.

Reasons for decision
Summary: Under subsection 320-40(1) of the ITAA 1997 a life insurance company is entitled to an exemption for one-third of specified management fees for contracts made with the company before 1 July 2000. Where there are changes made to a contract (a life insurance policy), the question whether there is the creation of a new contract or variation of an existing contract, is one of fact. Where there is a variation to a contract, the life insurance company will be entitled to an exemption under section 320-40 of the ITAA 1997 for specified management fees. If there is termination of a contract the life insurance company will not be entitled to an exemption under section 320-40 of the ITAA 1997 for specified management fees. In determining whether a contract is a mere variation or a termination, a court will examine the intention of the parties to the contract. In the case of Tallerman and Co Pty Ltd v. Nathan's Merchandise (Vic) Pty Ltd (1957) 98 CLR 93, Kitto J at 135 stated that: '(A) long line of authorities has committed the law to an acceptance of the doctrine that an agreement which deals with subsisting rights and obligations of the same parties under an earlier contract may vary that contract without terminating it, and that whether it effects a variation on the one hand or a discharge on the other is a question depending upon the intention of the parties as appearing from the new agreement.' A clear intention to bring all obligations to an end must be shown in order to establish a contract is terminated: see Fitzgerald v. Masters (1956) 95 CLR 420 at 431. The addition of an investment option in the terms and conditions of the contract does not create a new policy.

Legislative references: Income Tax Assessment Act 1997 section 320-40
Case references: Tallerman and Co Pty Ltd v. Nathan's Merchandise (Vic) Pty Ltd (1957) 98 CLR 93
Related ATO interpretative decisions: ATO ID 2002/587
Subject references: Management fees income Life assurance income Life assurance