ATO ID 2004/926: Portfolio transfer of general insurance liabilities: value of unearned premium reserve 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 unearned premium reserve of a general insurance company under section 321-60 of Schedule 2J to the Income Tax Assessment Act 1936 (ITAA 1936) include amounts in respect of policies where, under a portfolio transfer, the general insurance company has assumed the liability to provide insurance cover under the policies?

Decision
Yes. The unearned premium reserve of a general insurance company under section 321-60 of the ITAA 1936 does include amounts in respect of policies where, under a portfolio transfer, the general insurance company has assumed the liability to provide insurance cover under the policies.

Facts
The taxpayer is a general insurance company for the purposes of section 995-1 of the Income Tax Assessment Act 1997 (ITA 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 unearned premium reserve represents the liability that a general insurance company has to provide insurance cover in accordance with the terms of the insurance policies. Under the portfolio transfer, the taxpayer received that part of the gross premiums that relates to the unexpired risk period as consideration for assuming the liability to provide insurance cover under the general insurance policies of the transferor.

Reasons for decision
Summary: Section 321-60 of the ITAA 1936 defines the value of the unearned premium reserve as the 'net premiums received or receivable by the company in relation to those policies as the company determines, based on proper and reasonable estimates, to relate to risks covered by the policies in respect of later years of income.' Under the portfolio transfer the taxpayer has accepted, as consideration for assuming the obligation to provide insurance cover for the unexpired risk period, an amount based on the gross premiums previously received or receivable by the transferor. The acceptance of that sum and the undertaking to provide insurance cover is sufficient for the consideration to maintain its characterisation as gross premiums in the hands of the taxpayer. Thus, the consideration comes to be included in the assessable income of the taxpayer under section 321-45 of the ITAA 1936. As the period of risk cover under the policies may extend beyond the year of income in which the portfolio transfer occurred, the taxpayer is required to work out at the end of that income year, in accordance with section 321-60 of the ITAA 1936, the value of its net premiums that relate to risks covered by the policies in respect of later years of income and allocate it to its unearned premium reserve. Accordingly, the taxpayer's unearned premium reserve at the end of the financial year, under section 321-60 of the ITAA 1936, will include the part of the consideration received for assuming the liability to provide insurance cover under the general insurance policies of the transferor that the taxpayer determines, based on proper and reasonable estimates, to relate to risks to be covered in respect of later years of income. | 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. Therefore, from 1 July 2010, all references to Sections 321-45 and 321-60 of the ITAA 1936 should be read as referring to Sections 321-45 and 321-60 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 section 321-45 section 321-60
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 2004/923 | ATO ID 2004/924 | ATO ID 2004/925 | 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