ATO ID 2004/920: Capital Gains Tax: portfolio transfer of general insurance liabilities - acquisition of asset by transferor as against transferee
Date of decision: 1 November 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Does a general insurer, upon a full portfolio transfer, acquire a CGT asset, as against the transferee, for the purposes of Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) where the insurer undertook a full portfolio transfer by entering into a scheme for the transfer or amalgamation of insurance business under Division 3A of Part III of the Insurance Act 1973 and the portfolio transfer results in the general insurer having no ongoing liability at law to meet the claims arising from the transferred policies?

Decision
No. The general insurer does not acquire a CGT asset for the purposes of Parts 3-1 and 3-3 of the ITAA 1997, upon a full portfolio transfer, where the full portfolio transfer was undertaken in accordance with Division 3A of Part III of the Insurance Act and the portfolio transfer results in the general insurer having no ongoing liability at law to meet the claims arising from the transferred policies.

Facts
The transferor is a general insurance company for the purposes of section 995-1 of the ITAA 1997 and the Insurance Act. The transferor undertook a full portfolio transfer by entering into a scheme for the transfer or amalgamation of insurance business under Division 3A of Part III of the Insurance Act (the scheme), whereby the whole of its business is transferred to another insurance company (the transferee). Following the portfolio transfer, the transferor ceased its business operations. The scheme was confirmed by the Federal Court, and the Australian Prudential Regulation Authority (APRA) revoked the insurer's authorisation under section 15 of the Insurance Act. The transferor will have no ongoing liability at law to meet the claims arising out of the policies transferred as a result of a scheme.

Reasons for decision
Summary: In Federal Commissioner of Taxation v. Orica Limited (1998) 194 CLR 500; 98 ATC 4494; (1998) 39 ATR 66 (the Orica Case ) the taxpayer (Orica) entered into an agreement with the Melbourne Metropolitan Board of Works (MMBW) whereby MMBW agreed to assume Orica's obligations to repay the principal amounts due on debentures issued by Orica on their respective maturity dates. The High Court held that following the making of the agreement with MMBW, Orica remained liable on its debentures and the obligations of MMBW under the agreement did not discharge Orica from that liability. As a result, Orica, at all material times, retained the primary obligation to the debenture holders. Accordingly, by entering into the arrangement with MMBW, Orica acquired a CGT asset being the right to compel MMBW to pay Orica's debenture holders the principal amounts as and when they became due. Each performance and discharge by MMBW of its obligations under the agreement constituted a part ending or part satisfaction of Orica's CGT asset (a C2 CGT event happening to the relevant 'part' of Orica's CGT asset). Following confirmation of the scheme by the Federal Court and steps taken by APRA to revoke the transferor's authorisation under section 15 of the Insurance Act, the transferor has no ongoing liability at law to meet the claims arising out of the policies it transferred because of a portfolio transfer. Therefore, as the transferor has been discharged from its liabilities to the policyholders, the portfolio transfer does not result in the transferor acquiring a CGT asset as against the transferee. Accordingly, the decision in the Orica Case can be distinguished from the situation of a full portfolio transfer that takes place under Division 3A of Part III of the Insurance Act, and as the transferor does not acquire an asset, Parts 3-1 and 3-3 of the ITAA 1997 do not apply.

Legislative references: Income Tax Assessment Act 1997 Part 3-1 Part 3-3 section 995-1
Case references: Federal Commissioner of Taxation v. Orica Ltd (1998) 194 CLR 500 98 ATC 4494
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 2004/921 | ATO ID 2004/922 | 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
Subject references: General insurance General insurance industry Capital gains tax