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Ruling

Subject: Non-resident insurance and Division 15 of Part III of the Income Tax Assessment Act 1936 (ITAA1936)

Question 1

Are the following included in the amount of premiums which form part of assessable income under section 142 of the ITAA 1936:

§ Terrorism Premium?

§ Fire Service Levy?

§ Stamp Duty?

§ Brokerage Commission?

Answer

§ Yes

§ Yes

§ Yes

§ Yes

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

1. Entity K is an Australian financial services licence holder licensed to deal in, arrange and issue general insurance products.

2. Entity K has entered into an agreement with a non-resident insurer (NRI) that authorises Entity K to provide premium quotations and bind insurance contracts on behalf of the NRI.

3. Entity K will act as agent for the NRI for the purpose of collecting, processing and receiving premiums from insureds.

4. Entity K promotes insurance to Australian business entities on behalf of NRI, and when purchased by these entities, Entity K issues the insurance contract in Australia on behalf of the NRI.

5. Entity K issues each insured party under each insurance contract with a tax invoice for the gross premium payable for that risk and shows all taxes separately in the policy issued.

6. Entity K is responsible for the collection of taxes due from the insureds and payment of taxes to the appropriate authorities. Entity K will pay directly as required: to each relevant fire authority, the amount of levy recovered by them as part of every gross premium collected; to each State and/or Territory revenue office, the relevant stamp duties collected by them as part of every gross premium collected; and will include in their quarterly BAS returns all GST collected by them as part of every gross premium collected.

7. Entity K is required to deduct from premiums any withholding tax payable by the NRI and to pay this tax on behalf of the NRI.

8. The applicant advised that there are two types of commission charged for the policies issued. One is known as 'Brokerage Commission' and is charged as a percentage of the base premium (the risk component) by Entity K to the NRI. The second is charged by Entity K to the insured as an administration fee.

9. Entity K will retain X% (when issuing directly) or otherwise Y% of the premium as its Brokerage Commission and remit the Net Premium required by the NRI on a monthly basis.

10. The applicant provided the following definitions for terms used in the Application:

Base Premium: the premium identified by the NRI to be charged by it for accepting the insurance risk.

Terror Premium: a loading applied to the base premium to satisfy the NRI's obligation to cede reinsurance to the Australian terrorism pool.

Brokerage Commission: the amount payable by the NRI to Entity K for Entity K's administration and distribution of the insurance product.

Fire Services levy: a levy applied to the base premium plus the terror premium to recover the liability of the insurer to pay each relevant fire services authority in Australia.

Goods and Services Tax as defined by legislation. It is applied to the total base

(GST): premium, plus terror premium plus the fire services levy.

Stamp Duty: is the various licence fees and stamp duties applied by the respective states and territories. It applies to the total of base premium, terror premium, fire services levy, and GST.

Broker fees: these are charged by Entity K to the insured party for basic administration of the product.

Gross premium: the total amount payable by the insured party as consideration for the insurance contract. It consists of: the base premium; the terror premium; the fire services levy; GST; stamp duty and broker fees.

Net Premium: the base premium plus terror premium less the brokerage commission

The following facts regarding the terrorism premium, the Fire Services Levy and the relevant Stamp Duties Acts in all Australian states and territories are publicly available.

Terrorism Premium

11. The terrorism premium relates to a reinsurance product. In Australia this reinsurance is available from the Australian Reinsurance Pool Corporation (ARPC), established via the Terrorism Insurance Act 2003 (Cth) (TIA). The TIA ensures that insurance coverage will be provided for commercial property loss or damage, business interruption resulting from commercial property loss or damage and public liability claims in relation to declared terrorism incidents.

12. The TIA essentially overrides terrorism exclusion clauses in 'eligible insurance contracts' where the loss has occurred as a result of a 'declared terrorist incident' (DTI). Insurers are then liable to the insureds for eligible terrorism loss claims made under their policies (subsection 8(1) of the TIA).

13. Insurers are able, but not required, to reinsure the risk of claims arising from eligible terrorism loss by their insureds through the ARPC (subsection 8(4) of the TIA). Where the insurer chooses to enter into a reinsurance agreement with ARPC, the insurer is liable to pay ARPC premiums as the insured of ARPC.

14. The TIA scheme applies to 'eligible insurance contracts'. An eligible insurance contract is one which provides insurance cover for:

· loss or damage to 'eligible property' owned by the insured;

· business interruption arising from loss or damage to 'eligible property' owned/occupied by the insured; and,

· liability of the insured that arises from being the owner/occupier of the 'eligible property' (subsection 7(1) of the TIA).

15. Eligible property is property located in Australia and includes buildings (including fixtures) and tangible property located in/on such property (section 3 of the TIA). The TIA scheme does not cover residential property and contents, as well as Commonwealth or State Government property (Terrorism Insurance Regulations 2003 (Cth), Regulation 5 Schedule 1). The TIA scheme basically applies to all commercial property insurance policies.

16. The TIA is applicable to non-resident insurers, where the insurance contract fulfils the requirements of an 'eligible insurance contract' for the purposes of the TIA. Section 4 of the TIA states 'unless the contrary intention appears, this Act extends to acts, omissions, matters and things outside Australia'.

Fire Services/Emergency Services Levy

17. In Victoria a Fire Services Levy (FSL) is imposed on general insurance policies by the Metropolitan Fire Brigades Act 1958 (Vic) (MFBA) and the Country Fire Authority Act 1958 (Vic) (CFAA).

18. Section 3 of the MFBA classifies the following as an 'insurance company':

(a) a person (including a body corporate or unincorporate, a partnership or an underwriter) who issues or undertakes liability under policies of insurance against fire in respect of property in Victoria;

(b) a Lloyd's underwriter who:

(i) issues, or undertakes liability under, policies of insurance against fire in respect of property in Victoria; and

(ii) is a member of the Australian Fire Brigades Charges Scheme and makes payments to the Fund established under that Scheme;

19. Section 3 of the MFBA also defines an 'insurance intermediary' as:

(a) a person who arranges contracts of insurance in Victoria-

(i) for reward; and

(ii) as an agent for a person carrying on a business of insurance;

20. Under section 40 of the MFBA, an insurance company is responsible for lodging with the Board a return showing premiums received by or due to the insurance company attributable to insurance against fire. The Board then calculates the contribution of the insurance company according to a formula found in section 40B of the MFBA.

21. For the purposes of the MFBA, an insurance intermediary is required to make a return to the Board under section 44A, which states:

(1) This section applies if property in the metropolitan district is insured against fire with a person carrying on a business of insurance against fire, not being an insurance company required to make a return under section 40.

(2) If this section applies, within 14 days after the owner of the property insured has paid the premium-

(a) the insurance intermediary through whom the insurance is arranged; or

(b) if the insurance is not arranged through an insurance intermediary or is arranged through an insurance intermediary who does not carry on business in Victoria, the owner of the property insured-

must lodge with the Board a return in the prescribed form showing the portion of the total amount of the premium paid to the insurance intermediary or insurance company as is properly attributable to insurance against fire.

(3) The insurance intermediary or owner of the property insured must within 14 days after the owner of the property insured has paid the premium pay to the Board as a contribution …

22. Where the insurance intermediary does not make the required contribution, as legislatively required under section 44A, the insurance intermediary is penalised. The penalty is 10 penalty units and an additional penalty of double the amount that would have been payable as a fire contribution by the insurer.

23. The CFAA has the same definition of insurance intermediary and insurance company under section 3 of that Act and provides that the insurance intermediary is to provide the contribution to the Board under section 80A.

24. From 1 July 2013 the Victorian FSL will be replaced with the Fire Services Property Levy (FSPL). The FSPL is a property-based charge with concessions for people on low incomes and will be collected by local councils.

25. In New South Wales, the Emergency Services Levy (ESL) is governed by the Fire Brigades Act 1989 (NSW) (FBA). The Act classifies the following as an insurance company for the purposes of Part 5 of the FBA under section 44:

insurance company means a person, partnership, association or underwriter that:

(a) issues or undertakes liability under policies of insurance against loss of or damage to property situated in the State, or

(b) receives premiums in respect of policies of insurance against loss of or damage to property situated in the State on behalf of or for transmission to a person, partnership, association or underwriter outside the State.

26. The ESL is charged as a percentage of property and contents insurance policies' premiums (i.e. a tax on the premium), with the rate dependent upon whether the policy is residential or commercial.

27. Tasmania has a Fire Services Levy imposed by the Fire Service Act 1979. Division 2A of the Fire Service Act 1979 (in particular section 77A) is a general provision relating to defraying of operating costs of all brigades. The amount levied to insurance companies is outlined in subsection 77C(2) as:

'… 10%, or if another percentage is prescribed by the regulations, that other percentage, of the total premium income payable to insurance companies in respect of the prescribed classes of insurance during that financial year, which in either case is to be exclusive of any goods and services tax paid in respect of the relevant premium.'

28. All other states and territories do not have a FSL.

Stamp Duty

29. Stamp Duty is a general purpose tax that is imposed on various types of documents and transactions including policies of insurance (life and general). In Australia, each of the States and Territories impose stamp duty on insurance policies.

30. Stamp duty is payable to the relevant state and territory governments as follows:

NSW Section 229 of the Stamp Duties Act 1997 imposes duty in relation to 'a contract of insurance'. Section 235 makes the general insurer liable to duty.

South Australia Section 4 of the Stamp Duties Act 1923 states that duty is levied on an instrument. Section 34(1) makes a general insurer liable.

Western Australia: Section 207 of the Duties Act 2008 imposes duty on the premium paid in relation to a contract of insurance

Victoria: Section 175 of the Duties Act 2000 imposes duty in respect of insurance. Subsection 175(2) states that it is charged on a premium in relation to a contract of insurance. Section 180 requires that the general insurer is liable for duty.

Tasmania Section 162 of the Duties Act 2001 imposes duty on a 'contract of Insurance'.

Queensland: Paragraph 349(1)(b) of the Duties Act 2001 imposes duty on a 'contract of insurance that effects general insurance'.

ACT: Section 177 of the Duties Act 1999 imposes duty on contracts of general insurance, and section 180 makes the Insurer liable to pay duty.

Northern Territory: Section 5 of the Stamp Duty Act imposes duty on 'instruments' and section 38 makes stamp duty payable on a 'policy of Insurance'.

Relevant legislative provisions

Income Tax Assessment Act 1922 Section 28B

Income Tax Assessment Act 1936 Division 15

Income Tax Assessment Act 1936 section 142

Income Tax Assessment Act 1936 subsection 142(2)

Income Tax Assessment Act 1997 section 6-5 of the ITAA 1997

Income Tax Assessment Act 1997 section 17-5 of the

Income Tax Assessment Act 1997 paragraph 320-15(1)(a) of the ITAA 1997

Reasons for decision

All legislative references are to Division 15 of Part III of the Income Tax Assessment Act 1936 (ITAA1936) unless otherwise indicated.

Summary

For the purposes of section 142, the assessable premium includes the part of the premium that as is charged in relation to the following items:

(a) Terrorism Premium;

(b) Fire Services Levy;

(c) Stamp Duty; and

(d) Brokerage Commission.

Detailed reasoning

Pursuant to section 143, a non-resident insurer is deemed to have a taxable income equal to 10% of the total premiums it receives under a contract covered by section 142. Subsection 142(2) provides:

Where an insured person who is a resident has entered into an insurance contract with an insurer, and 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, any premium paid or payable under the contract shall, wherever the insured property is situate, or the insured event may happen, be included in the assessable income of the insurer and shall be deemed to be derived by the insurer from sources in Australia, and, unless the contract was made by a principal office or branch established by the insurer in Australia, this Division shall apply to that premium. [emphasis added]

The ordinary meaning of 'Premium'

The word 'premium' is not defined for the purposes of Division 15; as such, it should be interpreted having regard to its ordinary meaning in the context in which it is used.

Premium, in the context of insurance law, has been defined as 'a sum of money paid by an assured to an insurer in consideration of his indemnifying the assured for loss sustained in consequence on the risk insured against'; see for example Swain v Law Society [1982] 2 All ER 827 at 832.

The ordinary meaning of the word 'premium' was further discussed in Commissioner of State Revenue (Vic) v. Royal and Sun Alliance Insurance Australia Ltd [2003] VSCA 177 (the Royal and Sun case). In this case the Supreme Court of Victoria Court of Appeal considered whether the amount representing the GST payable by an insurer on the insurance policies it issued, and amounts on-charged to the insured, should be treated as part of 'premiums' and 'gross premiums' for the purposes of the relevant provisions of the Stamps Act 1958 (Vic). The Court of Appeal found that the word 'premium', as it appeared in the context of the Stamps Act 1958 (Vic), bore its ordinary meaning which was

the consideration, usually in the form of a monetary obligation, paid or payable by the insured for the grant or renewal of insurance cover or of other rights under a policy of insurance.

'Consideration' is also not defined in the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997). According to ATO Interpretive Decision ATO ID 2010/89: Whether non-resident royalty withholding tax is based on the GST inclusive or GST exclusive amount paid in respect of royalties, when the term 'consideration' is used to identify 'income' (as it was in that ATOID in respect of royalties), the term refers to the total amount paid or credited in respect of a specified item.

An insured party usually pays a premium to the insurer in exchange for the insurer's assumption of the insured's risk; Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658 at 663. The composition of the premium amount is determined by the insurer and reflects the selling price of the insurance. Though a premium may have numerous components (i.e. acquisition costs, claims handling costs), the total amount is the consideration the insured is required to pay for the insurer to indemnify them. That is, the premium is a periodic payment required to keep an insurance policy in effect.

In the Royal and Sun case, Ormiston JA concluded that notwithstanding that the insurer had charged a separate amount for GST and separately designated it in the invoices for the actual policies, the amount for GST formed part of the 'premium' or 'gross premiums' for the purposes of the Stamps Act 1958.

In reaching this conclusion, Ormiston JA observed at paragraph 28 that:

…the artifice of designating some of the consideration as fire services levy, stamp duty or GST, though acceptable in practice (and indeed in law), could not detract from the fact that the cover would not be granted unless the whole of the stipulated sums had been paid, whether called premiums, GST or whatever ... The total amount to be paid was (and still is) in fact the premium, unless by law it can be otherwise characterised or understood.

In other words 'consideration' comprises everything that must be paid, regardless of its description. By extension, the ordinary meaning of 'premium' encompasses these amounts.

This reasoning is consistent with Income Tax Ruling No. IT 2663, which considered the basis of assessment of general insurance activities for the purpose of the general taxing provisions that applied to general insurance companies prior to the introduction of specific provisions in Division 321 of Schedule 2J of the ITAA 1936 (now Division 321 of the ITAA 1997). IT 2663 is a precedential ATO view document (by virtue of paragraph 5 of the Practice Statement PSLA 2003/3). IT 2663 relevantly sets out the Commissioner's view as to which general insurance receipts are considered to constitute premium income of a resident insurer. The Ruling states at paragraphs 45-46:

45. All amounts received by a general insurer from an insured in connection with the writing of insurance contracts (including stamp duty and fire brigade charges) are income of the insurer assessable under section 6-5.

46. The word 'premium', as used in this Ruling, extends to all of these amounts.

At paragraph 48, the Ruling explains that general insurance receipts consist of several components, including a profit component and other components relating directly to expenses the insurer has to pay as a result of entering into the insurance contract, including:

(a) for all classes of general insurance business:

(i) an amount to pay claims;

(ii) an amount to meet administration costs;

(iii) an amount to meet commissions or brokerage;

(iv) an amount to pay stamp duty; and

(v) an amount to pay reinsurance premiums;

(b) for fire classes, an amount to pay for fire brigade charges

At paragraphs 49-50 the Ruling states that, although it is the insurer rather than the insured that is liable to pay certain government levies, charges and duties which arise under State or Territory legislation in relation to the insurance contract, the insurer is entitled (though not obliged) to include in the premium an amount to cover to these levies, charges or duties. To the extent they do include such amounts, they will be income of the insurer and assessable under section 6-5 of the ITAA 1997.

The above sets out that the ordinary usage of a general insurance 'premium' is very broad, encompassing all amounts which are received in connection with the insurance contract. Further in the context of identifying receipts that are ordinary income under 6-5 of the ITAA 1997, premium includes amounts which the insurer has on-charged to the insured.

'Premium' in the context of Division 15 of the ITAA 1936

Legislation in relation to insurance with non-resident insurance companies was introduced into Australian Tax Law by section 28B of the Income Tax Assessment Act 1922 to

'.. cause income tax to be payable by or on behalf of ex-Australian underwriters…upon an assumed profit of 10 per cent of all premiums on insurance effected in Australia by or on behalf of that underwriter.'

Clause 14 of the Explanatory notes to the Bill which introduced section 28B into the Income Tax Assessment Act 1922-1929, explains that the reasons for inserting this section in that Act was to ensure that income tax was payable by non-resident insurers in order to maintain a level playing field for Australian insurance companies.

This is reflected in clause 42 of the Explanatory Memorandum to the Income Tax Assessment Bill 1975 (that amended section 142) which states that 'the objective of Division 15 is to secure the imposition of tax on foreign insurance underwriters in respect of business (other than life assurance) provided by them in Australia in competition with Australian companies that provide such insurance.'

'Premium' is not defined for the purpose of Division 15; however, the legislative scheme of Division 15 clearly brings to tax, amounts received by foreign insurers in relation to business provided by them in Australia under general insurance contracts.

Further, in the Explanatory Memorandum to the Income Tax (International Agreements) Bill 1960, Division 15 was further described as:

Broadly speaking, the scheme of Division 15 is that premiums received by a non-resident insurer are subject to Australian tax (irrespective of where the contract is executed) if either -

(a)   the insured property is in Australia or the event insured against can only happen there; or

(b)   the insured person is an Australian resident, and the insurance was entered into through the instrumentality of an agent or representative in Australia of the overseas insurer.

The above is consistent with the description of section 142 in the Explanatory Memorandum to the Income Tax Assessment Bill 1935 which contemplates one single 'premium' being subject to tax in Australia, with no reference being made to the components that make up a premium...

Given that an objective of Division 15 is competitive neutrality between non-resident insurers and Australian insurers, it is follows that the 'premium' with which Division 15 is concerned with is the same premium that would have been assessable in terms of IT 2663 if it was received by a resident insurer. That is, premium for both these purposes is 'all amounts received by a general insurer from an insured in connection with the writing of insurance contracts'.

'paid or payable…'

Section 142 considers an amount that is paid or payable in determining whether a premium amount is assessable income for the purposes of section 142. It does not refer to the act of receiving the premium (actually or otherwise) as being determinative for working out the assessable income of the insured.

As neither the word 'paid' nor 'payable' is relevantly defined in the ITAA 1936, the words should be interpreted having regard to their ordinary meaning in the context in which they are used.

ATO Interpretive Decision ATO ID 2007/41 considers what might constitute a premium 'paid' to a life insurance company under paragraph 320-15(1)(a) of the ITAA 1997. In the Reasons for Decision, the ATO ID states the following:

The meaning of the word 'paid' was considered in Allen v. Thorn Electrical Industries Limited [1968] 1 QB 487; [1967] 2 All ER 1137 (Allen's case) in the context of the Prices and Incomes Act 1966 (UK) which had placed a freeze on wages. The employer company contended that the word meant 'actually paid' whilst the employees contended that it meant 'contracted to be paid'.

In Allen's case Lord Denning said at QB 503; All ER 1142:

In my opinion, therefore, in these sections the words, "the rate of remuneration paid for the same kind of work" before a particular date, mean "the rate of remuneration contracted to be paid for the same kind of work done" before that date.

The word 'paid' is a descriptive term rather than a technical term that, as Allen's case demonstrates, can be interpreted in certain contexts to be broader than just amounts that have actually been paid.

The Macquarie Dictionary defines 'paid' as:

Past tense and past participle of pay.

It further defines 'pay' as:

1.  to discharge (a debt, obligation, etc.), as by giving or doing something.

2.  to give (money, etc.) as in discharge of debt or obligation.

3.  to satisfy the claims of (a person, etc.) as by giving money due...

And 'payable' as:

1.  owed; to be paid; due.

2.  capable of being paid...

The payment of the premium by the insured constitutes the discharge of the insured's obligation to provide consideration for the insurer taking on the risk to indemnify a loss sustained by the insured for the risk insured against. Upon payment of the amount (or consideration) under the contract - that is, the premium - the insurer's subsequent use of the funds does not change the terms of the insurance contract nor the consumer's status as the 'insured'. Whether the insurer has 'constructively received' the funds or actually received them does not alter the fact that the insured has discharged their obligation to provide to the insurer the consideration (i.e. premium) for the insurance policy. As such, the insured has paid the premium for the purposes of section 142.

'under the contract…'

The meaning of 'under the contract' was considered in the Victorian Credit Tribunal in the case Australia & New Zealand Banking Group Limited v Various Debtors & Anor (1997) ASC 56-369. This case concerned an application by ANZ to declare a debtor as liable to pay a credit charge. As part of the application, the Tribunal considered the meaning of 'under the contract' for the purposes of Schedule 4 of the Credit Act 1984 (Vic). In the contracts before the Tribunal, the Applicant had argued that notwithstanding that part of the loan money was used in payment of credit insurance premium, it was not included 'on the contract' as part of the amount financed because the appropriate parts of the contract were left blank. The Applicant argued that Schedule 4 is confined to amounts payable under the contract and these were not payable under the contract by virtue of the blanks.

Below are some relevant passages from the judgment at section 3.5 What Does "Under the Contract" Mean?:

There are a large number of cases referring to what is meant by the phrase ``under the contract'' or words to a similar effect. Perhaps a prime example is Chan and Another v Cresdon Proprietary Limited [1989] 168 CLR. 242. In that case a guarantor avoided liability under a guarantee of obligations arising ``under this lease'' because those words were held to refer only to obligations arising under the original tenancy agreement. The agreement was unregistered and when the lessee went into possession and paid rent a common law tenancy came into existence and the obligation to pay the rent came under that common law tenancy rather than the original lease and so was outside the guarantee …

The High Court in Thurn and Another v. The Commissioner of Taxation of The Commonwealth of Australia [1965] 112 C.L.R. 432 in the judgment of Kitto J at 437 stated that:

"Taking the view that the policy money became payable to her `under' the policy notwithstanding that her title to it depended upon the assignment as well as the policy, the Commissioner treated it as included in the estate for duty purposes by force of s. 8(4)(f). A contention submitted in support of the appeal is that the expression `under a policy', in this provision, directs attention to the terms of the policy alone, so that the paragraph applies only where the widow (or relative) is specifically pointed out by the policy as the person to whom or in trust for whom payment of the policy money is to be made. It is not easy to see why the word `under' in this context should be given the narrow meaning thus suggested, for it is a word commonly used to describe the relation between a right and the root of title from which the right is derived even if derived through intervening dispositions.''

The Appellant argued that if an amount (for example stamp duty) is not shown in the loan contract, then it is not 'payable under the loan contract'. However the Tribunal found that it would be artificial to say that payments related to disbursements to third parties which are in effect costs of the supporting security for the loan contracts, are not payable under those contracts. Ultimately, it was held that that the words 'under the contract' have wide interpretation and that the failure to properly complete the contract did not change the fact that the relevant payment was made under the contract.

For the purposes of section 142, the amount which is included in the insurer's assessable income is the premium the insured is required to pay under the contract. That is, as an insurance contract requires consideration from the insured for it to be a valid contract, the consideration (the premium), is required for the insured to be indemnified under the insurance contract. The payment by the insured is sufficient for the amount to become assessable income of the insurer for the purposes of section 142.

Application to Entity K's circumstances

The above discussion contains a distinction between components of an insurance premium and costs met by or on behalf of the non-resident insurer out of the insurance premium.

(a) Terror Premium

The component of premium noted as 'terrorism premium' in accordance with the TIA is consideration provided by the insured in relation to the coverage of terrorism risk. Though terrorism risk insurance is mandatory in eligible insurance contracts, the insurer is liable for losses incurred from terrorist acts subject to the terms of the insurance contract and the terms of the TIA. Following the definition in Swain and in terms of the components which make up a premium as set out in IT 2663, the insured is paying the insurer consideration for indemnification from terrorism risk. For the purposes of Division 15, this amount forms part of the premium.

(b) Fire Services Levy (FSL)

As the FSL is directly levied on insurance companies as defined for the purposes of the FBA, such as Entity K and the NRI (see paragraphs 44(a) and 44(b) of the FBA), Entity K is liable to pay the fire brigade contributions under section 48 of the FBA on behalf of the non-resident insurer.

The Supreme Court of Victoria considered whether the meaning of 'premium' for the purposes of Part 2 of Chapter 8 of the Duties Act 2000 (Vic) included FSL in The Shell Company of Australia Limited v Commissioner of State Revenue [2011] VSC 147 (Shell Company case). Shell Company, by taking out fire insurance with an unregistered insurer, was liable to pay the fire insurance contribution on behalf of the unregistered insurer. In addition to the fire insurance contribution payable on the premium, Shell was also required to pay duty on the premium. Shell calculated the duty payable on the premium exclusive of the FSL. The Commissioner of State Revenue (CSR) contended that the meaning of premium, for the purposes of calculating duty, included the FSL amount. Davies J, agreeing with the CSR, stated:

The FSL, whether paid or payable, is taken to be part of the "premium" on which duty is chargeable for the purposes of Part 2 of Chapter 8.

Consistent with paragraph 48 of IT 2663, the FSL is considered to be another component of the premium charged by the insurer. Were the insured not to pay the insurer the FSL component, the insurer would not indemnify the risk. As the insurer is not collecting the FSL component of the premium on behalf of a third party, and is the beneficial and economic owner of the FSL component once paid by the insured, the insurer derives the benefit/advantage from the payment. Following the definition in the case of Currie v Misa (1875) LR 10 Ex 153, 162 valuable consideration was described as:

either… some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other

The FSL component is classified as 'consideration' for the policy as the insurer derives the benefit from the payment whilst the insured must provide the payment. For the purpose of Division 15, this amount is classified as premium.

The amount of premium representing FSL is not payment of the FSL by the insured. Rather, FSL is an expense of the insurer and the fact that the insurer on-charges FSL as part of the premium does not re-characterise that portion of the premium. That is, the portion still forms part of the common law premium and is therefore 'premium paid or payable under the contract' for the purposes of section 142.

The component of FSL for NSW, Tasmania and Victoria (noting that FSL is being phased out in Victoria) forms part of the premium for the purposes of Division 15.

(c) Stamp Duty

Stamp duty is imposed on the insurance contract and is an expense (acquisition cost) of the insurer. The legislation imposing stamp duty does not preclude an insurer from on-charging its liability to stamp duty to the insured. As with the FSL, the amount of premium on-charged for stamp duty does not constitute payment of the stamp duty by the insured. Rather, stamp duty remains an expense of the insurer, the application of the portion of the premium received to meet its own liability does not re-characterise the portion of the premium.

For example, in NSW Chapter 8 of the Duties Act 1997 charges duty on the amount of the premium paid in relation to a contract of insurance that effects general insurance (section 229). Subsection 231(1) provides that the premium means the total consideration given to an insurer by or on behalf of the insured to effect insurance. The liability for stamp duty on insurance contracts rests with the insurer (section 235); however, the insurer is not prevented from on-charging its stamp duty liability to a policy holder. Similar provisions are found in each of the State and Territory laws imposing stamp duty on insurance contracts.

IT 2663 sets out the industry practice of including an amount to pay stamp duty as a component of the premium charged to the insured. At paragraph 50, IT 2663 explains that such amounts are received as part of the insurers business and therefore were considered to constitute assessable income under section 6-5 of the ITAA 1997 prior to the introduction of the specific insurance provisions in Division 321.of the ITAA 1997.

As stamp duty is included as a component of 'premium' in its ordinary usage, including for resident insurers, this component forms part of the premium paid or payable under the contract for the purposes of section 142.

(d) Brokerage Commission

Charge to the insured

Premium has been defined in Swain v Law Society [1982] 2 All ER 827, 832 as 'a sum of money paid by an assured to an insurer in consideration of his indemnifying the assured for loss sustained in consequence on the risk insured against'. Paragraph 45 of IT 2663 states that premium income is 'all amounts received by a general insurer from an insured in connection with the writing of insurance contracts'.

The payment by the insured to Entity K of administration fees is not for the purpose of indemnifying the insured of a specific risk. The administration fees to Entity K are not remitted to the NRI. Further, the fees are not paid for the indemnification of risk under the insurance contract written by the NRI. The Agreement between Entity K and the NRI states that fees and charges applied by Entity K must be shown separate from the policy. The payment of administration fees is a transaction between Entity K and the insured, rather than between the insured and the NRI. Therefore the administration fees do not form part of the premium for the purposes of Division 15.

Charge to the non-resident insurer

Comparatively, the brokerage commission Entity K deducts from the base premium forms part of the 'premium' for the purposes of Division 15. This brokerage commission, similar to FSL and stamp duty, is in connection with the writing of the insurance contract and a cost which is met from premiums. Paragraph 48 of IT 2663 states that:

The general insurance industry regards a premium as consisting of several components… these other components include… an amount to meet commissions or brokerage.

The purpose of the payment by the insured was as consideration for the indemnification of risk through the issuance an insurance policy; the choice of the insurer to use a component of that payment of premium as a brokerage commission is a business decision that does not detract its character as 'premium' for the purposes of Division 15.

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