Insurance facts and figures 2007 - PwC

• under the hedging election and provided certain requirements are met, tax should no
longer distort the effectiveness of hedges as the rules allow the timing of gains and
losses to be hedged without character (ie revenue versus capital) mismatches.
There are a number of exemptions from the application of the TOFA rules. In particular,
general insurance and life insurance policies are specifically excluded. In addition, the
Government in the 2007 Federal Budget announced that finance leases will be excluded
from the TOFA rules and therefore, retain its existing tax treatment.
The rules are proposed to apply from 1 July 2007 (by election) or mandatorily
from 1 July 2008. For early balancing companies, the start date is the beginning
of the first income year after 1 July 2007 (optional) or the first income year after
1 July 2008 (mandatory). The TOFA rules apply to financial arrangements entered into
after the relevant start date unless an election is made to also bring existing financial
arrangements into the regime.
GENERAL INSURANCE
In Australia, general insurance companies are assessed under Division 321 of the
Income Tax Assessment Act (ITAA) 1936. Tax is payable on the profits of a general
insurer at the corporate tax rate, currently 30 per cent.
Division 321 essentially codifies the guidelines on the appropriate tax treatment of
premiums and claims specific to general insurers contained in Income Tax Ruling
IT2663. The legislation effectively applies the treatments outlined in IT2663, for example,
that outstanding claims reserves are required to be discounted (a position challenged in
the 1999 Mercantile Mutual case). Division 321 applies from the 1991–1992 income year
for general insurers.
The legislation also applies the treatment of reinsurers contained in Income Tax Ruling
TR95/5, which applies to reinsurers from the 1995–1996 income years.
In 1996, the ATO issued the publicly binding Income Tax Ruling TR96/2, which deals
with the taxation of financial insurance and financial reinsurance.
Premium income
Division 321 of the ITAA legislates the manner in which premium income is earned by an
insurer for taxation purposes.
An insurance premium has a number of components. The gross premium, including
components referable to fire brigade charges, stamp duty and other statutory charges
must be included as assessable income. Insurers must recognise premium income from
the date of attachment of risk. As a result, unclosed business will be brought to account
in calculating tax liability.
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