ATO ID 2003/962: Life insurance company: reinsurance recoveries
Date of decision: 20 October 2003
Year of income: Year ended 30 June 2001
Business line: Public Groups and International

Issue
Is an amount assessable under paragraph 320-15(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) if the amount is received by a life insurance company on or after 1 July 2000 under a contract of reinsurance and the amount relates to the risk component of a claim that was paid by the company prior to 1 July 2000?

Decision
Yes. An amount received by a life insurance company under a contract of reinsurance is assessable under paragraph 320-15(1)(b) of the ITAA 1997 if the amount is received on or after 1 July 2000 under a contract of reinsurance and the amount relates to the risk component of a claim that was paid by the company prior to 1 July 2000.

Facts
A life insurance company pays a claim of $100,000 under a life insurance policy on 20 June 2000. The policy is a pure death policy that does not provide participating benefits or discretionary benefits and is not an exempt life insurance policy. For the income year ended 30 June 2000, section 112BA of the Income Tax Assessment Act 1936 applied and the life insurance company did not obtain a deduction in respect of the $100,000 claim paid under the policy. Section 112BA was repealed with effect from 1 July 2000. The life insurance company has a contract of reinsurance with a reinsurance company in respect of the life insurance policy. The life insurance company receives a $70,000 reinsurance recovery in relation to the claim on 21 July 2000 from the reinsurance company under the contract of reinsurance.

Reasons for decision
Summary: Division 320 of the ITAA 1997 introduced a new basis for taxing life insurance companies with effect from 1 July 2000. Division 320 includes specific provisions for assessing certain amounts received by a life insurance company, including amounts received under a contract of reinsurance. An amount received by a life insurance company under a contract of reinsurance is assessable under paragraph 320-15(1)(b) of the ITAA 1997 to the extent to which the amount relates to the risk component of claims paid under the life insurance policy. The risk component of claims paid under a life insurance policy is determined under subsection 320-80(2) of the ITAA 1997. Accordingly, where a claim is paid before 1 July 2000, and a reinsurance recovery is received in relation to the claim after that date, subsection 320-80(2) of the ITAA 1997 applies to determine whether there is a risk component of the claim for the purposes of paragraph 320-15(1)(b) of the ITAA 1997. The fact that the claim was paid before 1 July 2000 does not prevent subsection 320-80(2) of the ITAA 1997 applying to determine the risk component of claim for the purposes of applying paragraph 320-15(1)(b) of the ITAA 1997. The risk component of claims paid under a life insurance policy is specified in paragraph 320-80(2)(a)to the ITAA 1997 to be the amount of the claim paid if: For the purposes of paragraph 320-15(1)(b) of the ITAA 1997, the risk component of the claim paid by the life insurance company would therefore be $100,000, as the policy does not provide participating or discretionary benefits, is not an exempt life insurance policy and only provides benefits on the death of the policyholder. The reinsurance recovery of $70,000 is paid to the life insurance company under the reinsurance contract as a consequence of the life insurance company paying the policyholder claim of $100,000. The full amount of the reinsurance recovery is therefore considered to relate to the claim paid of $100,000. Accordingly, as the $70,000 reinsurance recovery relates to the risk component of the claim paid, $70,000 is included in the assessable income of the life insurance company for the year ended 30 June 2001 under paragraph 320-15(1)(b) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Division 320 paragraph 320-15(1)(b) subsection 320-80(2) paragraph 320-80(2)(a)
Subject references: Reinsurance & reinsurers Life insurance company Life assurance income