ATO ID 2013/59: Income derived by non-resident insurer
Date of decision: 12 November 2013
Year of income: Year ended 30 June 2013
Business line: Public Groups and International

Issue
Is the amount of a premium paid or payable to a non-resident insurer under an insurance contract assessable under section 142 of the Income Tax Assessment Act 1936 (ITAA 1936) where the premium has been determined after taking into account amounts such as stamp duty that are payable by the insurer in relation to the insurance contract?

Decision
Yes. The amount of a premium paid or payable to a non-resident insurer under an insurance contract is assessable under section 142 of the ITAA 1936 where the premium has been determined after taking into account amounts such as stamp duty that are payable by the insurer in relation to the insurance contract.

Facts
AusCo is an Australian Financial Services Licence holder licensed to deal in, arrange and issue general insurance products. AusCo entered into an agreement with ForCo, a non-resident insurer. The agreement authorises AusCo to provide premium quotations and bind insurance contracts on behalf of ForCo with Australian residents. AusCo will act as agent for ForCo for the purpose of collecting, processing and receiving premiums from insureds. AusCo will use part of the premiums to pay all taxes, levies and stamp duties that are payable by ForCo in relation to the insurance contracts to the appropriate authorities on behalf of ForCo. AusCo will pass on to ForCo the balance of the premiums, after retaining any commission to which it is entitled to under the Agreement. AusCo entered into an insurance contract on behalf of ForCo. Stamp duty was payable by ForCo under the relevant stamp duty legislation. The premium charged by ForCo was calculated taking into account the stamp duty that was payable by ForCo. AusCo collected the premium from the insured. AusCo paid the stamp duty, and also other applicable charges and levies that were payable by ForCo in relation to the premium, from the premium received. AusCo then deducted the commission it was entitled to under its agreement with ForCo before paying the balance of the premium to ForCo.

Reasons for decision
Summary: Section 142 of the ITAA 1936 includes certain premiums that are paid or payable to a non-resident insurer in the assessable income of the insurer. The word 'premium' is not defined for the purposes of section 142 of the ITAA 1936 and should be interpreted having regard to its ordinary meaning in the context in which it is used ( Project Blue Sky Inc and Others v. Australian Broadcasting Authority (1998) 194 CLR 355 at 381-382; (1998) 153 ALR 490 at 509; [1998] HCA 28 at 69-70). The ordinary meaning of the word 'premium' was discussed in Commissioner of State Revenue (Vic) v. Royal and Sun Alliance Insurance Australia Ltd [2003] VSCA 177; (2003) 54 ATR 339; 2003 ATC 4998 (the Royal and Sun case). The issue in this case was whether the premiums and gross premiums for the purposes of the relevant part of the Stamps Act 1958 (Vic) should include that part of the premium that was charged to cover the GST payable by the insurer in relation to the insurance policies. The Court found that the word premium, as it appeared in the context of that Act, bore its ordinary meaning which was: [27]... the consideration, usually in the form of a monetary obligation, paid or payable by the insured for the grant or renewal of insurance cover or of other rights under a policy of insurance. An insured party pays a premium to the insurer in exchange for the insurer's assumption of the insured's risk upon the happening of some event ( Prudential Insurance Co v. Inland Revenue Commissioners [1904] 2 KB 658 at 663). The composition of the premium amount is determined by the insurer and is a reflection of the selling price of the insurance. Additionally, though a premium may have numerous components, it is the total amount of the consideration the insured is required to pay to secure the grant or renewal of the insurance cover. That is, the premium is a required payment for an insurance policy to have effect. In the Royal and Sun case, Ormiston JA concluded that notwithstanding that the insurer had separately designated in its policies an amount in relation to the GST it had to pay itself in relation to the policy, the total amount payable by the insured under the policy for the insurance cover formed part of the 'premium' or 'gross premiums' for the purposes of the Stamps Act 1958 (Vic). In reaching this conclusion, Ormiston JA observed that: [28]...the artifice of designating some of the consideration as fire services levy, stamp duty or GST, though acceptable in practice (and indeed in law), could not detract from the fact that the cover would not be granted unless the whole of the stipulated sums had been paid, whether called premiums, GST or whatever ... The total amount to be paid was (and still is) in fact the premium, unless by law it can be otherwise characterised or understood. The ordinary meaning of an insurance premium therefore encompasses everything that must be paid by the insured to the insurer for the insurance cover, regardless of whether the amount payable is divided into a number of parts on the insurance policy. The total amount of the premium that AusCo collects from the insured on behalf of ForCo will therefore be the premium paid or payable under the contract for the purposes of section 142 of the ITAA 1936. This includes that part of the premium that is used to pay expenses such as stamp duty on behalf of ForCo. Where the conditions of section 142 are met, the full amount of the premium will therefore be assessable under that provision. This can be contrasted with the situation where stamp duty is levied on the insured and not the insurer and the insurer did not include a component in relation to the 'stamp duty' in the premium that it charged the insured. In this situation the payment of the stamp duty by the insured would not be a premium that was paid or payable to the insurer within the ordinary meaning of the word premium.

Legislative references: Income Tax Assessment Act 1936 section 142
Case references: Project Blue Sky Inc and Others v. Australian Broadcasting Authority (1998) 194 CLR 355 (1998) 153 ALR 490 [1998] HCA 28
Subject references: general insurance insurance industry general insurance industry insurance income international tax insurance brokers & agents insurance industry non-resident insurance industry