Private ruling: Non-resident insurer
Published: February 2013
Ruling period: Income years ended 30 June 2006 to 30 June 2015 (inclusive)
Date scheme commenced: 1 July 2005

Ruling: Q1: Is Company A able to use carried forward tax losses from prior years to determine its taxable income for the purposes of section 143 of the Income Tax Assessment Act 1936 (ITAA 1936). | A1: No. Satisfaction of the conditions in section 142 of the ITAA 1936 precedes the application of section 143 of the ITAA 1936. As Company A has not satisfied the conditions in section 142 of the ITAA 1936, section 143 of the ITAA 1936 has no application in the circumstances. | Q2: Is Australian sourced interest income derived by Company A which is already subject to Australian interest withholding tax at the rate of 10% excluded from the calculation of the taxable income of Company A pursuant to section 143 of the ITAA 1936? | A2: As Company A has not satisfied the conditions in section 142 of the ITAA 1936, section 143 of the ITAA 1936 has no application in the circumstances.

Relevant facts and circumstances: Company A is a company incorporated in Country X and is also a tax resident of Country X. Company A is not a resident of Australia for taxation purposes, and does not have a permanent establishment in Australia. Company A underwrites risk for the Australian operations of Company B in relation to warranty programs, and receives premium income exclusively from Company B. Policies issued by Company A cover the cost of claims incurred by Company B in relation to warranties. The terms and conditions of the insurance policy between Company A and Company B for the relevant period are set out in the Insurance Certificate, and the Master Policy. Under the Master Policy: · Company A indemnifies Company B for losses; · all claims shall be notified to the Insured's nominated Administrator; · there are general exclusions to indemnification; · the policy shall also cover losses which occur outside Australia, and which are reported to the Administrator, provided that the loss originated from Company B's sales within Australia; · no apportionment is made to allocate the premium paid by Company B to claims or events which occur within Australia or outside of Australia. Company A also receives interest income from funds placed on deposit with an Australian resident group company. This income is subject to Australian interest withholding tax at the rate of 10%. Company A is in a notional tax loss position for some of the relevant income years, calculated by reference to its Australian insurance contract revenue and the expenditure incurred in deriving that revenue during those income years. An Australian resident related entity of Company A acted as an insurance broker for Company B by identifying the most appropriate insurance policy to underwrite Company B's product warranty liability. This entity was not acting as an agent or representative of Company A in Australia in the course of its insurance broking services. Furthermore, Company A did not have an agent or representative in Australia who was instrumental in inducing Company B to enter into the insurance contract with Company A.

Relevant legislative provisions: Income Tax Assessment Act 1936 subparagraph 128B(2)(a)(i) | Income Tax Assessment Act 1936 subsection 128B(5) | Income Tax Assessment Act 1936 section 128D | Income Tax Assessment Act 1936 section 141 | Income Tax Assessment Act 1936 subsection 142(1) | Income Tax Assessment Act 1936 subsection 142(2) | Income Tax Assessment Act 1936 section 143 | Income Tax Assessment Act 1997 subsection 6-5(3) | Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 section 7 Article 11(2) of the New Zealand Agreement and the New Zealand Convention | Article 11(5) of the New Zealand Agreement | Article 11(7) of the New Zealand Convention

Reasons for decision: Detailed Reasoning - Insurance with non-residents: Division 15 of Part III of the ITAA 1936 includes sections 141 to 143 of the ITAA 1936 which sets out certain taxation consequences for insurance with non-residents. Section 141 of the ITAA 1936 defines an 'insurance contract' for the purposes of Division 15 of Part III of the ITAA 1936 as meaning: ... a contract or guarantee whereby liability is undertaken, contingent upon the happening of any specified event, to pay any money or make good any loss or damage, but does not include a contract of life assurance The relevant insurance contract in the present circumstance is comprised of the Insurance Certificate and the related Master Policy, which is taken to be representative of the terms and conditions of the insurance policy between Company A and Company B for the relevant periods covered by this ruling. Under the Master Policy, Company A indemnifies Company B for losses arising to Company B under warranties. Accordingly, under the contract between Company A and Company B, Company A undertakes liability for the costs incurred by Company B to repair or replace damaged goods covered by the contract. As such, the insurance contract between Company A and Company B meets all of the criteria of the definition of 'insurance contract' under section 141 of the ITAA 1936. Section 142 of the ITAA 1936 operates to include insurance premiums under certain insurance contracts in the assessable income of a non-resident insurer, and to deem those premiums to be derived by the non-resident insurer from sources in Australia in certain circumstances. Section 143 of the ITAA 1936 then provides for the calculation of the non-resident insurer's taxable income. Satisfaction of the conditions in section 142 of the ITAA 1936 precedes application of the calculation methodologies prescribed by section 143 of the ITAA 1936. Subsection 142(1) of the ITAA 1936 provides that the insurance premium payable under an insurance contract is included in the non-resident insurer's assessable income where: (a) the insured property is situated in Australia at the time of the making of the contract; or (b) the insured event is one that can only happen in Australia, and provided the contract was not made by a principal office or branch established by the insurer in Australia. Section 141 of the ITAA 1936 defines 'insured property' as the property which is the subject of an insurance contract made or given by an insurer, and 'insured event' as an event upon the happening of which the liability under an insurance contract arises. Subsection 142(1) of the ITAA 1936 does not bring into assessable income, an insurance premium paid or payable under an insurance contract providing coverage for insured properties situated both within and outside Australia, or for an insured event that may happen either within or outside Australia. In this regard, ATO Interpretative Decision ATO ID 2004/411 (ATO ID 2004/411) states that as subsection 142(1) of the ITAA 1936 does not provide a mechanism for apportionment of the insurance premium under an insurance contract, there is no authority to attribute part of the premium to properties situated in Australia. Thus, insurance premiums under insurance contracts which cover properties situated in Australia and other countries, where the geographical location of the properties is not specified in the insurance contract, and there is no allocation of the premium in respect of the different properties covered, will not be included in the assessable income of the non-resident insurer under subsection 142(1) of the ITAA 1936. Similarly, ATO Interpretative Decision ATO ID 2004/413 confirms that an insurance premium under an insurance contract which covers insured events that may occur within or outside of Australia, where there is no allocation of the premium to the extent to which the insured event may occur within or outside of Australia, will not be included in the assessable income of the non-resident insurer under subsection 142(1) of the ITAA 1936, as that provision requires the insured event is one which can only happen in Australia. In respect of the first condition in subsection 142(1) of the ITAA 1936 as to the location of insured property, the contract between Company A and Company B is not a contract of insurance in respect of real or movable property. As the subject of the contract is not 'insured property' for the purposes of section 141 of the ITAA 1936, the first condition is not applicable. In the present circumstances, liability under the contract arises on the happening of an event, being the incurring of costs by Company B to repair or replace goods covered by the contract that are subject to breakdown. Accordingly, the contract is one that covers insured events for the purposes of section 141 of the ITAA 1936 and therefore falls within the second condition in subsection 142(1) of the ITAA 1936 in relation to the occurrence of an insured event. An insurance premium under an insurance contract which covers insured events will only be included in the non-resident insurer's assessable income under section 142(1) of the ITAA 1936 where the insured events dealt with under the contract are ones that can only happen in Australia . Therefore, in circumstances where the liability of the insurer under a contract extends to loss from events that can happen outside Australia and the insurance contract does not provide for an allocation of the premium, then no part of the premium will be assessable under subsection 142(1) of the ITAA 1936. In the present circumstance, if events insured under the insurance contract between Company A and Company B can happen outside Australia, and the premium payable under the contract is not capable of being allocated between events that may happen in and outside of Australia, then no part of the premium will be included in assessable income under subsection 142(1) of the ITAA 1936. | Detailed Reasoning - What are the insured events under the contract? Are those insured events ones that can only happen in Australia?: The insurance contract between Company A and Company B states that the insurer shall indemnify the insured for the cost of repair or replacement of goods subject to warranty. The insurance contract makes it clear that the contract covers losses arising from the occurrence of insured events outside Australia, provided that the loss originated from sales in Australia. Such a circumstance might arise where a good which was sold by Company B in Australia and which was accompanied by a Company B Product Care card experienced breakdown whilst being located outside Australia, and this resulted in Company B incurring a loss. It is the Commissioner's understanding that in this circumstance, the insured event would have occurred outside Australia. This is because the breakdown which caused the loss occurred outside Australia, Cf. RACV Insurance Pty Ltd v FCT 74 ATC 4169. In that case, the court held that the liability of the insurer arose at the time of the occurrence of a motor vehicle accident that gave rise to a claim under the relevant insurance contract. | Detailed Reasoning - Is the premium payable under the contract capable of being allocated between events that may happen in and outside of Australia?: The insurance contract does not provide for any apportionment or allocation of the insurance premium to events occurring within or outside of Australia. Accordingly, as the insured event is one that may happen within and outside Australia, and there is no apportionment of the insurance premium, subsection 142(1) of the ITAA 1936 does not apply to the insurance premium under the insurance contract between Company A and Company B. In that circumstance, section 142 of the ITAA 1936 will have no application unless subsection 142(2) applies. Subsection 142(2) of the ITAA 1936 provides that the insurance premium is to be deemed to be derived by the insurer from sources in Australia, and included in assessable income, regardless of where the insured property is situated or the insured event happens, where an agent or representative in Australia of the insurer was in any way instrumental in inducing the entry of the insured person into that contract, and the contract was not made by a principal office or branch established by the insurer in Australia. Although an Australian resident related entity of Company A acted as an insurance broker for Company B by identifying the most appropriate insurance policy to underwrite Company B's product warranty liability that entity was not acting as an agent or representative of Company A in Australia in the course of its insurance broking services. Furthermore, Company A did not have an agent or representative in Australia who was instrumental in inducing Company B to enter into the insurance contract with Company A. As such, subsection 142(2) of the ITAA 1936 is not satisfied. As subsections 142(1) and 142(2) of the ITAA 1936 do not apply to the premiums paid or payable under the insurance contract between Company A and Company B, section 143 of the ITAA 1936 has no application in the circumstances. | Detailed Reasoning - Non-resident interest withholding tax: It has been determined previously that under the insurance contract between Company A and Company B, section 143 of the ITAA 1936 has no application in the calculation of the taxable income of Company A. Company A does not have a permanent establishment in Australia. Company A receives interest income from funds placed on deposit with an Australian resident group company. This income is subject to Australian interest withholding tax at the rate of 10%. Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident includes ordinary income derived directly or indirectly from all Australian sources during the income year. Interest is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997. Section 128D of the ITAA 1936 provides that interest upon which withholding tax is payable is not assessable income and is not exempt income. A non-resident is liable for withholding tax on interest paid by an Australian resident pursuant to subparagraph 128B(2)(a)(i) and subsection 128B(5) of the ITAA 1936. This is provided the interest is not derived by the non-resident in carrying on a business in Australia through a permanent establishment. Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 provides that the rate of withholding tax on interest paid to non-residents is 10%. In determining liability to tax on income derived by a non-resident, it is also necessary to consider any applicable tax treaty that Australia may have concluded with the country of residence of the non-resident. Company A is a resident of Country X for income tax purposes, therefore Australia's right to tax Australian sourced interest derived by Company A during the period of the ruling is subject to the provisions of the applicable tax treaty between Australia and Country X ('the Country X treaty'). Accordingly, interest income of Company A that is paid by an Australian resident is subject to withholding tax at the rate of 10% pursuant to the Country X treaty. Therefore, as the income is subject to withholding tax it is excluded from Company A's assessable income pursuant to section 128D of the ITAA 1936.

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