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Authorisation Number: 1051242063922
Date of advice: 25 July 2017
Subject: GST and portfolio transfer
Does the transfer of risk and liabilities by an insurer to the entity in respect of an insurance policy constitute a “portfolio transfer’ under section 78-118 of the A New Tax System (Goods and Services Tax) Act 1999?
Relevant facts and circumstances
Pursuant to the statutory provisions of the relevant legislation, the insurer makes a payment to the entity representing the portion of the premium that covers the period during which the entity makes a payment or provides services to the insured in settlement of a claim.
The entity and the insurer entered into a Memorandum of Understanding (MoU) which explains how the payment process is facilitated.
The MoU provides that when the payment is made by the insurer to the entity, the insurer no longer has liabilities to the insured in respect of the insurance policy.
The MoU provides that it does not create legal relations between the entity and the insurer.
Reasons for decision
The transfer of a book of insurance from one insurer to another insurer is known within the insurance industry as a portfolio transfer.
For the purpose of section 78-118 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), paragraph 6.37 of the Revised Explanatory Memorandum to the Taxation Laws Amendment Bill (No.6) 2001 (the REM) provides that:
'Generally, a portfolio transfer occurs where an arrangement is entered into by 2 insurers and under the arrangement the second insurer undertakes to meet the liabilities, such as the liability to pay claims, under insurance policies issued by the first insurer.’
The REM further explains that a portfolio transfer is contractual in nature and does not include situations where statutory provisions may provide that an entity will assume liability for a claim without any contractual agreement between the two insurers.
Therefore, a portfolio transfer is an arrangement that has two elements namely:
● there must be two insurers; and
● a contractual agreement between them.
Is the entity an insurer for the purpose of section 78-118 of the GST Act?
The term 'insurer’ is not defined in the GST Act. Therefore, we determine its meaning in the context of its use in the provision.
Subsection 15AB(1) of the Acts Interpretation Act 1901 provides that if any material is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material. The REM is such a material. It accompanied the Taxation Laws Amendment Bill (No.6) 2001 when introduced into Parliament and explained the intentions of the Bill
The Acts Interpretation Act 1901 further provides that the preferred interpretation of the provision of an Act is the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act).
As the REM explains, the purpose of section 78-118 of the GST Act is to treat the transferee insurer in a portfolio transfer to be treated as the insurer in relation to the insurance policy. This section would enable certain provisions of Division 78 of the GST Act that only apply to the insurer that issued the policy to apply to the transferee insurer. Section 78-118 is a response to the insurance industry’s advice that portfolio transfers between insurers are common. Therefore, we take the view that for the purpose of section 78-118, an insurer is an entity carrying on an insurance business who enters into an insurance contract under which it promises to pay, in return for a premium, the insured a sum of money or to provide the insured with a corresponding benefit upon the occurrence of the insured event. Accordingly, we do not consider the entity to be an insurer for the purpose of section 78-118.
In your submission, you referred to the definition of 'insurer’ in paragraph 121 of the Draft Goods and Services Tax Ruling GSTR 2005/D9. GSTR 2005/D9, which has been finalised as Goods and Services Tax Ruling GSTR 2006/10, is about payments of money or supplies made by an insurer in the course of settling a claim under an insurance policy. We take the view that an 'insurer’ is defined in GSTR 2005/D9 in the context of an insurance contract under which the party that provides insurance protection is the insurer. Therefore, if we use this definition for the purpose of section 78-118 of the GST Act, each of the insurers referred to is an entity that provides insurance protection under an insurance contract. While you submitted that the entity provides a level of insurance to the insured parties, the entity does not do so by entering into an insurance contract with the insured.
A 'general insurer’ is defined in section 11 of the Insurance Act 1973 as a body corporate that is authorised under section 12 to carry on insurance business in Australia. This definition suggests that an insurer is an entity that is authorised to carry on an insurance business.
The Barron’s Dictionary of Insurance Terms, Fourth Edition defines an insurer as company offering protection through the sale of an insurance policy to the insured. This definition is reflected in Understand Insurance, an online resource published by the Insurance Council of Australia, where an 'insurer’ is defined as 'the insurance company that issues a policy to you to help protect against certain risks’.
You submitted that there is no requirement in the GST Act for an entity to be a licenced insurer for section 78-118 of the GST Act to apply and that, in the context of 'HIH rescue entities’ taken to be insurers, it is inferred that 'HIH rescue entities’ are not limited to types of entities . While the term 'insurer’ is not defined in the GST Act requiring an insurer to be licenced for section 78-118 to apply, it does not follow that the section would apply to entities in general. Division 78 is mainly about supplies and acquisitions under an insurance policy. Therefore, an insurer is taken to be an entity that issues an insurance policy.
An 'HIH rescue entity’ is defined in section 195-1 of the GST Act; thus, an 'HIH rescue entity’ can only be an entity specified in that definition. An HIH rescue entity is taken to be an insurer by virtue of section 78-120. It cannot be used to define an insurer for the purpose of section 78-118.
The purpose of section 78-118 of the GST Act is not to define an insurer but to treat the transferee insurer as the insurer that issued the insurance policy so that Division 78 would apply to the transferee insurer.
Is there a contractual agreement entered into by the entity and the insurer?
Section 78-118 of the GST Act deals with an arrangement that is in the nature of a portfolio transfer. As mentioned above, REM provides that a portfolio transfer is contractual in nature. Therefore, there must be a contractual agreement between the two insurers for section 78-118 to apply.
A contract is a legally enforceable understanding between two or more persons or legal entities. For a contract to exist, the parties to an agreement must intend to create legal relations.
The entity entered into a Memorandum of Understanding (MoU) with the insurer to detail how the payment process is facilitated and to reflect the transfer to the entity of the insurer’s liability under the insurance policy once the payment is made to the entity.
The MoU provides that the MoU does not create legal relations; thus, the agreement is not legally enforceable. The entity does not have a contractual agreement with the insurer under which the entity undertakes to meet the liabilities of the insurer.
The statutory provisions of the relevant legislation allow the entity to assume liabilities for a claim without a contractual agreement with the insurer. Accordingly, we take the view that the transfer of risks and liabilities to the entity does not constitute a portfolio transfer for the purpose of section 78-118 of the GST Act.
You submitted that despite the fact that the transfer of risks insured by HIH to HIH rescue entities was facilitated by legislative amendments, such transfer was treated as a portfolio transfer. As explained in paragraph 6.35 of the REM, portfolio transfers have occurred as a result of various contractual arrangements with HIH companies.
Our conclusion is not contrary to the policy intent of section 78-118 of the GST Act. It is clear from the REM, particularly in paragraph 6.37, that it is intended that statutory created liabilities are carved out from the concept of ’portfolio transfers’ and the operation of section 78-118. It may be argued that our conclusion is contrary to the general policy intent of Division 78; however, this general policy intent cannot override the apparent intent regarding the specific provision, or the clear words of the GST Act.
As regards the definition of 'insurer’, we relied on the REM in the context of the policy intent of section 78-118 of the GST Act. The term 'insurer’ is used throughout Division 78; therefore, the term in the later addition of section 78-118 is simply consistent with that broader usage. The meaning of 'insurer’ would be more properly answered by looking at Division 78 as a whole and any explanatory material on the use of the term.
In determining the meaning of 'portfolio transfer’, the reliance on the REM is entirely appropriate. ’Portfolio transfer’ is not a defined term and the REM gives clear guidance on the intended meaning of the term.