Edited version of your private ruling

Authorisation Number: 1012460927302

Ruling

Subject: Insurance with non-residents

Question 1

Would the Parent Companies or ServiceCo or the Australian tax consolidated entities have any liability under section 144 of the Income Tax Assessment Act 1936 ('ITAA 1936'), as agent of the insurers, in respect of premiums paid to the insurers under the Insurance Policies for the payment of income tax assessed to the insurers under Division 15 of Part III of the ITAA 1936?

Answer

No.

Question 2

Does section 145 of the Income Tax Assessment Act 1936 operate to deny deductibility of the amounts incurred by HeadCo (as head company of its tax consolidated group) as its contribution to insurance premiums in relation to the Insurance Policies entered into by ParentCo A and ParentCo B?

Answer

No.

This ruling applies for the following periods:

For the years ending 30 June 2009 to 30 June 2016

The scheme commences on:

1 July 2008

Relevant facts and circumstances

HeadCo is the head company of its Australian tax consolidated group. SubCo1 and SubCo2 are both subsidiary members of that tax consolidated group. For the purposes of this ruling these three entities are referred to as 'the Australian tax consolidated entities'.

HeadCo is part of the worldwide Group, the ultimate parent company of which is ParentCo A.

There are two other group holding companies, including ParentCo B. ParentCo A and ParentCo B are incorporated outside of Australia.

ParentCo A and ParentCo B (collectively, 'the Parent Companies') have entered into insurance policies held with a consortium of non-resident insurers, which provides insurance cover for the Group globally. HeadCo and its wholly owned subsidiaries are not party to these insurance contracts.

In respect of the consortium of non-resident insurers, the insurers' obligations under each of the insurance policies are several and not joint, and are limited to the extent of their individual signed subscriptions.

Each insurance policy has a term of 1 year and is renegotiated on a yearly basis to provide continuous insurance coverage.

For the year ended 30 June 20XX, the insurance policies comprise Policy1 and Policy2 (collectively 'the Insurance Policies').

The Insurance Policies have a Policy Period of 1 July 20YY to 1 July 20XX, which may be extended at pro rata policy terms if required.

The geographical limit of the Insurance Policies is worldwide.

The insured entities under the Insurance Policies include the Parent Companies and other entities in the Group now existing, previously constituted or as may subsequently be constituted (collectively, 'the Insured').

Subject to the specified exclusions, cover provided by Policy1 includes:

1) Risk of loss or damage to certain property;

2) Liability coverage for all sums which the Insured is legally obligated to pay as damages in certain circumstances;

3) Coverage for all sums which the Insured becomes legally liable to pay as compensation in certain circumstances.

Subject to the specified exclusions, cover provided by Policy2 includes:

1) Loss of or damage to certain property caused by specified circumstances;

2) Certain types of loss in respect of specified circumstances:

3) Payments in respect of personal accident.

The Insurance Policies set out some of the property insured in Schedules. One of the Schedules identifies the place of registration and operation of some of the property. Some of the property are registered and operated in Australia.

The Insurance Policies also extends to certain property which are added during the Policy Period at pro rata additional premium, and where property has been sold or disposed of the Insured shall be entitled to a pro rata return of the premium.

The premium under each Insurance Policy is payable by way of an initial deposit.

The premium under each Insurance Policy is recalculated at the end of the year to take into account property which is added or removed. The adjustment is based on a fixed percentage of average value of certain property. In this respect, there are separate adjustment rates used for Policy1, and separate adjustment rates according to jurisdiction for Policy2.

The premium may be reduced for certain property which is being maintained or is otherwise not operated.

The Insurance Policies do not provide for any allocation of the insurance premium to the extent to which insured property is located within Australia or for insured events that may happen only in Australia.

For administrative convenience all invoices for insurance premiums are issued by the insurance broker to a Group company incorporated outside of Australia, ServiceCo.

Under the terms of the shared services agreement, ServiceCo on-charges the cost of the premiums to a Group company in each jurisdiction covered under the Insurance Policies based on the aggregate value of certain property in each jurisdiction. In relation to Australia, ServiceCo on-charges a portion of the cost of the premiums to: HeadCo, SubCo1 or SubCo2.

No agent or representative in Australia of the non-resident insurer was in any way instrumental in inducing the entry of the insured into the Insurance Policies.

HeadCo, SubCo1 or SubCo2 do not act on behalf of the insurer.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 141

Income Tax Assessment Act 1936 subsection 142(1)

Income Tax Assessment Act 1936 subsection 142(2)

Income Tax Assessment Act 1936 section 143

Income Tax Assessment Act 1936 section 144

Income Tax Assessment Act 1936 section 145

Reasons for decision

Question 1

Division 15 of Part III of the ITAA 1936 sets out certain taxation consequences for insurance with non-residents.

Section 141 of the ITAA 1936 defines an 'insurance contract' for the purposes of Division 15 of Part III of the ITAA 1936 as:

a contract or guarantee whereby liability is undertaken, contingent upon the happening of any specified event, to pay any money or make good any loss or damage, but does not include a contract of life assurance.

For the year ended 30 June 20XX, the Insurance Policies comprise Policy1 and Policy2, which were entered into by ParentCo A and ParentCo B, and a consortium of non-resident insurers.

The Insurance Policies have a Policy Period of 1 July 20YY to 1 July 20XX, which may be extended at pro rata policy terms if required. They are taken to be representative of the terms and conditions of the insurance policies for the years ended 30 June 200Z to 30 June 20YY, and for the years ending 30 June 2014 to 30 June 2016.

Under the Insurance Policies, the insurers undertake liability, in their respective proportions, for amongst other things:

· risk of loss or damage to certain property;

· sums which the Insured is legally obligated to pay as damages or compensation in certain circumstances;

· money paid or loss suffered by the Insured in certain circumstances.

The Insurance Policies are not contracts of life assurance.

Accordingly, each Insurance Policy meets the criteria of the definition of 'insurance contract' under section 141 of the ITAA 1936.

Section 142 of the ITAA 1936 operates to include certain insurance premiums in the assessable income of a non-resident insurer, and to deem those premiums to be derived by the non-resident insurer from sources in Australia in certain circumstances.

Section 143 of the ITAA 1936 deems the insurer to have derived in respect of the premiums paid or payable in a given year taxable income equal to 10% of the total amount of the premiums. However, where the actual profit or loss derived or made by the insurer in respect of the premiums can be established to the satisfaction of the Commissioner, the taxable income or loss shall be calculated by reference to receipts and expenditure taken into account in calculating the profit or loss.

Section 144 of the ITAA 1936 provides for liability to tax of the insured person and any person in Australia acting on behalf of the insurer where those persons pays or credits to the insurer any amount in respect of the insurance contract before arrangements have been made to the satisfaction of the Commissioner for the payment of any income tax which has been or may be assessed under Division 15 of the ITAA 1936 in respect of those amounts.

Satisfaction of the conditions in section 142 of the ITAA 1936 precedes application of the calculation methodologies prescribed by section 143 of the ITAA 1936, and the operation of section 144 of the ITAA 1936.

Subsection 142(1) of the ITAA 1936 provides that the insurance premium payable under an insurance contract is included in the non-resident insurer's assessable income where:

a) the insured property is situated in Australia at the time of the making of the contract; or

b) the insured event is one that can only happen in Australia, and

provided the contract was not made by a principal office or branch established by the insurer in Australia.

Section 141 of the ITAA 1936 defines 'insured property' as the property which is the subject of an insurance contract made or given by an insurer, and 'insured event' as an event upon the happening of which the liability under an insurance contract arises.

Subsection 142(1) of the ITAA 1936 does not bring into assessable income an insurance premium paid or payable under an insurance contract providing coverage for insured properties that may be situated within and outside Australia, or for an insured event that may happen either within or outside Australia.

In this regard, ATO Interpretative Decision ATO ID 2004/411 states that as subsection 142(1) of the ITAA 1936 does not provide a mechanism for apportionment of the insurance premium under an insurance contract, there is no authority to attribute part of the premium to properties situated in Australia. Thus, insurance premiums under insurance contracts which cover properties situated in Australia and other countries, where the geographical location of the properties is not specified in the insurance contract, and there is no allocation of the premium in respect of the different properties covered, will not be included in the assessable income of the non-resident insurer under subsection 142(1) of the ITAA 1936.

ATO Interpretative Decision ATO ID 2004/412 states that an insurance premium is also not assessable under subsection 142(1) of the ITAA 1936 where the properties covered under the insurance contract are situated in Australia and other countries, there is no allocation of the premium in respect of the different properties that are covered by the insurance contract, and the geographical location of the properties is specified in the insurance contract. This is because the specification of the location of the properties in the insurance contract is considered to be immaterial as ultimately it is the location itself of those properties that is the determinative factor.

Similarly, ATO Interpretative Decision ATO ID 2004/413 confirms that an insurance premium under an insurance contract which covers insured events that may occur within or outside of Australia, where there is no allocation of the premium to the extent to which the insured event may occur within or outside of Australia, will not be included in the assessable income of the non-resident insurer under subsection 142(1) of the ITAA 1936, as that provision requires the insured event is one which can only happen in Australia.

In the present circumstances, both conditions of subsection 142(1) of the ITAA 1936 are relevant as the Insurance Policies provide cover for 'insured property', and 'insured events', being the circumstances in which the Insured is legally obligated to pay damages or compensation, or pays money or suffers loss or damage.

The geographical limit of the Insurance Policies is worldwide, thereby covering property located within and outside of Australia, as well as events which may occur within or outside of Australia. Although the Insurance Policies specify the location of some of the property, the Insurance Policies do not provide for any allocation of the insurance premium to the extent to which insured property is located within Australia or for insured events that may happen only in Australia.

In these circumstances, no part of the premium of the Insurance Policies will be included in the assessable income of the insurer under subsection 142(1) of the ITAA 1936.

Accordingly, section 142 of the ITAA 1936 will have no application unless subsection 142(2) applies.

Subsection 142(2) of the ITAA 1936 provides that the insurance premium is to be deemed to be derived by the insurer from sources in Australia, and included in assessable income, regardless of where the insured property is situated or the insured event happens, where 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, and the contract was not made by a principal office or branch established by the insurer in Australia.

In the present circumstances, no agent or representative in Australia of the non-resident insurer was in any way instrumental in inducing the entry of the Parent Companies into the Insurance Policies. As such, subsection 142(2) of the ITAA 1936 is not satisfied.

As subsections 142(1) and 142(2) of the ITAA 1936 do not apply to the premiums paid or payable under the Insurance Policies, section 143 of the ITAA 1936 and section 144 of the ITAA 1936 have no application in the circumstances. Thus, the insurers will have no taxable income in terms of section 143 of the ITAA 1936, and ParentCo A and ParentCo B do not have any liability under section 144 of the ITAA 1936.

Section 141 of the ITAA 1936 defines 'insured person' to mean 'a person with whom any insurance contract is entered into by an insurer'. The Australian tax consolidated entities and ServiceCo are not an 'insured person' as they are not parties to the Insurance Policies. Further, the Australian tax consolidated entities do not act on behalf of the insurer. Accordingly, section 144 of the ITAA 1936 has no application to the Australian tax consolidated entities or ServiceCo.

Question 2

Section 145 of the ITAA 1936 denies a deduction to an insured person for insurance premiums paid or payable in certain circumstances. It states:

Notwithstanding any other provision of this Act, no such premium shall be an allowable deduction to the insured person unless arrangements have been made to the satisfaction of the Commissioner for the payment of any income tax which has been or may be assessed in respect of that premium.

The reference to 'such premium' in section 145 of the ITAA 1936 is a reference to the premium contemplated in section 142 of the ITAA 1936. For section 145 of the ITAA 1936 to apply, the entity claiming the deduction must be the insured person and section 142 of the ITAA 1936 must apply to the insurance premiums paid or payable.

Section 141 of the ITAA 1936 defines 'insured person' to mean 'a person with whom any insurance contract is entered into by an insurer', and 'insurer' as 'any non-resident who undertakes liability under an insurance contract'.

In the present circumstances, for administrative convenience, the insurance premiums under the Insurance Policies are issued by the insurance broker to ServiceCo, a Group company incorporated outside of Australia.

Under the shared services agreement, ServiceCo on-charges the cost of the premiums to a Group company in each jurisdiction covered under the Insurance Policies based on the aggregate value of certain property in each jurisdiction. In relation to Australia, ServiceCo on-charges a portion of the cost of the premiums to: HeadCo, SubCo1, or SubCo2.

The shared services agreement is not an 'insurance contract' for the purposes of Division 15 of the ITAA 1936 as it is not a contract or guarantee whereby liability is undertaken, contingent upon the happening of any specified event, to pay any money or make good any loss or damage. It follows that payments under the shared services agreement are not payments of insurance premium for the purposes of section 142 of the ITAA 1936.

Accordingly, section 145 of the ITAA 1936 has no application to the payments made under the shared services agreement by HeadCo (as head company of its tax consolidated group) to ServiceCo as contributions to insurance premiums under Insurance Policies entered into by the Parent Companies.

Additionally, HeadCo and its wholly owned subsidiaries are not parties to the Insurance Policies held with the consortium of insurers, and thus they are not an 'insured person' with respect to the Insurance Policies for the purposes of section 145 of the ITAA 1936.

It is noted that section 145 of the ITAA 1936 is a privative provision which principally has the purpose of denying a deduction to the insured person for premiums paid to a non-resident insurer unless satisfactory arrangements have been made to pay income tax arising from those premiums which are included in the assessable income of the non-resident insurer. It is not a provision under which deductibility of expenditure falls to be considered per se. Before any expenditure falls to be considered by section 145 of the ITAA 1936, such expenditure first needs to satisfy conditions of deductibility under a provision of the income tax legislation, for example section 8-1 of the Income Tax Assessment Act 1997.