Minister for Revenue and Assistant Treasurer
26 November 2001 - 17 July 2004
11 September 2002
TAXATION OF LIFE INSURANCE COMPANIES
The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, today announced amendments to the income tax law affecting life insurance companies.
Legislation to implement the Review of Business Tax life insurance reforms, which commenced on 1 July 2000, was developed in consultation with the life insurance industry.
Senator Coonan said the proposed amendments, which will also take effect from 1 July 2000, overcome technical problems that the industry has raised following the practical application of the new legislation.
"The amendments demonstrate how the Government and industry can work together to improve the operation of the income tax law," Senator Coonan said.
The amendments will ensure that any "ordinary class" losses of life insurance companies can be applied only against the "ordinary class" of taxable income. Similarly, "virtual pooled superannuation trust" losses will be able to be applied only against the complying superannuation class of taxable income.
The amendments will also overcome concerns raised by the life insurance industry about the operation of the income tax law in relation to life insurance companies that reinsure with non-residents.
In particular, the amendments will ensure that, for life insurance companies, the special provisions in the law that apply to reinsurance with non-residents will only apply to accident and disability business that is reinsured with non-resident reinsurers.
The amendments will ensure that, where a deduction is denied for the reinsurance premiums, the value of liabilities in relation to the risk component of the policies is not reduced by the component of the policies that is reinsured with non-resident reinsurers.
The Minister also announced a series of technical amendments to the provisions in the income tax law affecting life insurance companies. These amendments are outlined in Attachment A.
Legislation to implement the proposed amendments will be developed in consultation with industry.
The technical amendments affecting life insurance companies will:
- change some references to amounts `received' in section 320-35 of the Income Tax Assessment Act 1997 to amounts `derived';
- ensure that fees included in assessable income under paragraph 320-15(k) qualify for transitional relief;
- clarify that any expenses incurred by life insurance companies in respect of the virtual PST or segregated exempt assets do not qualify for transitional relief;
- ensure that where a risk rider is classified as a participating policy and is held in the virtual PST, the deduction available under section 320-55 is not reduced by the premium paid for the rider;
- ensure that friendly society funeral policies are taxed as investment policies;
- clarify that a deduction is not available under section 320-75 in respect of a life insurance policy that is a virtual PST policy, an exempt life insurance policy, a policy that provides participating discretionary benefits or a policy that provides benefits only on death and disability;
- ensure that the assessable income of life insurance companies does not include an amount representing a decrease in value of risk liabilities where a corresponding deduction is not available if there is an increase in value of those liabilities;
- ensure that the exemption that applies to income bonds, funeral policies and scholarship plans issued by friendly societies will also apply to sickness policies, including sickness and funeral policies;
- ensure that appropriate transitional arrangements apply to the activities of friendly societies that were previously exempt from tax;
- correct the reference to an incorrect subsection in the definitions of `notional undeducted cost' and `notional adjustable value';
- ensure that life insurance companies have 60 days after the end of the income year to value virtual PST liabilities and exempt life insurance policy liabilities. Transfers of the assets will then occur within 30 days of the later of the annual valuation of assets or the annual valuation of liabilities;
- ensure that depreciation and other capital allowances relating to virtual PST assets will qualify as deductions that reduce the virtual PST assessable income;
- make consequential amendments resulting from the Senate amendments to the
New Business Tax (Miscellaneous) Bill (No 2) 2000 to ensure, for example,
- an exempt life insurance policy that can be held in the segregated exempt assets of a life insurance company can include all of the exempt pension business of complying superannuation funds and PSTs;
- subsection 320-245(3), which defines when an exempt life insurance policy provides for allocated benefits, is modified so that it is not restricted to segregated current pension assets of the holder;
- the value of segregated exempt assets do not include provisions for tax; and
- references to provisions that were removed by the Senate amendments are removed from the capital gains tax provisions; and
- ensure that policies that provide for immediate annuities will qualify as exempt life insurance policies only if they satisfy the approved annuity conditions that applied prior to the introduction of Division 320.