ATO Interpretative Decision

ATO ID 2005/363

Income Tax

Issue

In determining the shareholders' share of the income tax liability of a life insurance company for the purposes of Step 1 of the method statement in subsection 219-50(2) of the Income Tax Assessment Act 1997 (ITAA 1997), is it necessary that the income tax liability relates to an amount of assessable income that is attributable to shareholders?

Decision

No. In determining the shareholders' share of the income tax liability of a life insurance company for the purposes of Step 1 of the method statement in subsection 219-50(2) of the ITAA 1997, it is not necessary that the income tax liability relates to an amount of assessable income that is attributable to shareholders.

Facts

The taxpayer is a life insurance company as defined in subsection 995-1(1) of the ITAA 1997.

The ordinary class of taxable income of the taxpayer is $1,000, being investment income in relation to ordinary life insurance policies.

The taxpayer charges a fee of $100 in relation to ordinary insurance policies, which it sources from the $1,000 investment income. The $100 is not assessable income of the taxpayer.

The income tax liability of the taxpayer is $300.

In relation to the investment income, the taxpayer's liability to ordinary policyholders increases by $630, being the $1,000 investment income less the fee of $100 and $270 income tax liability. Accordingly, only $270 of the $300 income tax liability of the company is taken into account in determining the liability of the company to its ordinary policyholders.

The net profit of the taxpayer increases by $70, effectively representing the management fee of $100 less income tax of $30.

Reasons for Decision

Life insurance companies pay tax on income that can be distributed to shareholders and also on income that is credited to policyholders. Accordingly, Division 219 of the ITAA 1997 contains the principle that franking credits can only arise in relation to that part of the income tax liability of the company that is attributable to shareholders.

The shareholders' share of the income tax liability of a life insurance company is defined in Step 1 of the method statement in subsection 219-50(2) of the ITAA 1997 as 'the part of the company's total income tax liability for the income year that is attributable to the company's shareholders'.

While the management fee is not included in assessable income of the taxpayer, this is not in itself a conclusive factor in determining whether part of the income tax liability is attributable to shareholders. The management fee is not specifically included in assessable income because of the fee and charge mechanism that is adopted in Division 320 of the ITAA 1997. However, Division 320 is only relevant for determining the taxable income and income tax liability of the taxpayer.

Once the income tax liability of the company is determined, the franking credit that arises for a life insurance company in respect of this income tax liability is determined under Division 219 of the ITAA 1997. There is nothing in Division 219 to indicate that this determination is affected by the operation of Division 320 of the ITAA 1997.

Division 219 of the ITAA 1997 does not require that an amount of income be assessable in order for a franking credit to arise in relation to the income tax liability that the income creates. Rather, Division 219 adopts the principle that a franking credit will arise where the income tax liability is attributable to shareholders.

The fact that Division 219 of the ITAA 1997 adopts this test indicates that the income tax liability of a life insurance company can be attributable to someone other than shareholders, such as the policyholders of the company. Accordingly, Division 219 is not concerned with whether the income tax liability relates to an amount of assessable income, but rather, whether the income tax liability is attributable to either the shareholders or the policyholders of a life insurance company.

The taxpayer allocated part of its income tax liability to policyholders when it determined its liability to those policyholders. To the extent that the income tax liability is allocated to policyholders, it is considered to be attributable to those policyholders, rather than to the shareholders of the company. Only that part of the income tax liability that is not allocated to policyholders could be considered to be attributable to shareholders.

Given that $270 of the $300 income tax liability is allocated to policyholders, the balance of the liability (being $30) is considered to be attributable to shareholders. The fact that the net profit only increased by $70 in respect of the $100 management fee supports the conclusion that $30 of the income tax liability is attributable to shareholders.

There is no requirement under subsection 219-50(2) of the ITAA 1997 that the amount of $30 must relate to assessable income that is attributable to shareholders. Accordingly, $30 of the income tax liability of the taxpayer would be attributable to shareholders for the purposes of Step 1 of the method statement in subsection 219-50(2).

Year of income:  Year ended 30 June 2006

Legislative References:
Income Tax Assessment Act 1997
   Division 219
   subsection 219-50(2)
   Division 320
   subsection 995-1(1)

Keywords
Life insurance company
Franking credits

Siebel/TDMS Reference Number:  4613725; 1-5QS6MM5; 1-CIZJVUM

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  23 December 2005
Date reviewed:  22 January 2018

ISSN: 1445-2782