ATO ID 2004/922: Portfolio transfer of general insurance liabilities: value of outstanding claims liability of a general insurance company that assumes 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 under section 321-20 of Schedule 2J to the Income Tax Assessment Act 1936 (ITAA 1936) include an amount in respect of the liability for outstanding claims that has been assumed by the general insurance company under a portfolio transfer where the liability has not been discharged by the general insurance company at the end of the year of income?

Decision
Yes. The outstanding claims liability of a general insurance company under section 321-20 of the ITAA 1936 does include an amount in respect of the liability for outstanding claims that has been assumed by the general insurance company under a portfolio transfer where the liability has not been discharged by the general insurance company at the end of the year of income.

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. Under the portfolio transfer, the taxpayer received an amount from the transferor in consideration for the taxpayer assuming the transferor's outstanding claims liability in relation to the transferred policies. The outstanding claims liability represents a proper and reasonable estimate of the present value of the transferor's liabilities for claims under its general insurance policies and direct settlement cost associated with those claims.

Reasons for decision
Summary: Section 321-20 of the ITAA 1936 defines the value of the outstanding claims liability as 'the sum of the amounts that...the company determines, based on proper and reasonable estimates, to be appropriate to set aside and invest in order to meet: (i) liabilities for outstanding claims under those policies; and (ii) direct settlement costs associated with those outstanding claims; less....any part of that sum....the company expects to recover under a policy of reinsurance...'. The value of the outstanding claims liability is therefore related to claims to be met by the taxpayer in subsequent income years. The effect of the portfolio transfer on the outstanding claims liability is twofold. Firstly, any outstanding claims liability is taken over by the taxpayer. Secondly, the transferor's outstanding claims liability is effectively discharged. As the taxpayer has assumed liability in respect of the outstanding claims, the taxpayer would be expected to set aside and invest an amount to in order to meet these liabilities and the direct settlement costs associated with the claims. Accordingly, if the liability has not been discharged, the taxpayer's outstanding claims liability at the end of the year of income under section 321-20 of the ITAA 1936 will include an amount in respect of the liabilities that it assumed under the 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 2004/913 | 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 2004/923 | 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