Edited version of your private ruling

Authorisation Number: 1012617374315

Ruling

Subject: Tax treatment of premiums received by a non-resident insurer

Question 1

Is any amount of premium paid by Company A to Company X under the insurance contract in relation to insured property situated in Australia or in relation to insured events which can only happen in Australia, included in Company X's assessable income and deemed to have an Australian source under section 142 of the Income Tax Assessment Act 1936?

Answer

No

This ruling applies for the following periods:

Period 1 January 2013 to 31 December 2013

Period 1 January 2014 to 31 December 2014

Period 1 January 2015 to 31 December 2015

Period 1 January 2016 to 31 December 2016

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

Company X is a non-resident captive insurance company providing insurance services for the companies and interests of a corporate group to which it is a member.

Company A, Company B and Company C are members of the corporate group of which company X is a member. Company A is the non-resident head entity of the group. Company A owns all the shares in Company B, another non-resident company. Company B indirectly owns all the shares in Company X. Company C is an Australian resident company whose ultimate holding company is Company A.

Company A has entered into an insurance contract with Company X. The contract was entered into outside of Australia. No agent or representative of Company X in Australia was in any way instrumental in inducing Company A into entering the insurance contract.

The insurance contract provides coverage for:

• insured property which is situated within Australia and property which is situated outside of Australia at the time of the making of the contract, and

• insured events which can happen in Australia, outside of Australia and both within and outside of Australia.

The contract only provides for a total premium and does not apportion the premium to the extent insured property is situated in Australia or insured events can only happen in Australia.

A portion of the premium is allocated internally to Company C. The allocation amount and methodology are not specified in the insurance contract.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 141

Income Tax Assessment Act 1936 Section 142

Income Tax Assessment Act 1936 Subsection 142(1)

Income Tax Assessment Act 1936 Subsection 142(2)

Reasons for decision

Section 142 of the Income Tax Assessment Act 1936 (ITAA 1936) concerns certain premiums paid or payable to non-resident insurers under an insurance contract. Broadly, it applies in the following circumstances:

1. Irrespective of whether the insured person is a resident of Australia:

n at the time of the making of the contract the insured property is situated in Australia, or

n the insured event can only happen in Australia.

2. Where the insured person is a resident of Australia:

n an agent or representative of the insurer in Australia was in any way instrumental in inducing the insured person to enter into the insurance contract.

If section 142 of the ITAA 1936 applies, the amount of premium paid or payable to the non-resident insurer will be deemed to be derived from Australian sources and included in the assessable income of the non-resident insurer.

'Insurance contract' is defined in section 141 of the ITAA 1936 to mean '…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.'

Section 141 of the ITAA 1936 defines an 'insurer' as '…any non-resident who undertakes liability under an insurance contract.'

Company X has entered into a contract with Company A. Under that contract Company X has undertaken liability, contingent upon the happening of specified events in the contract, to pay money or make good loss or damage arising from those events. The contract Company X has entered into with Company A is an insurance contract and Company X is an insurer for the purposes of section 142 of the ITAA 1936.

Section 141 of the ITAA 1936 defines 'insured person' as '…a person with whom any insurance contract is entered into by an insurer.' A person as defined subsection 6(1) of the ITAA 1936 includes a company. Company A has entered into an insurance contract with Company X. For the purposes of section 142 of the ITAA 1936, Company A is an insured person.

Subsection 142(1) of the ITAA 1936

Subsection 142(1) of the ITAA 1936 provides that:

Where an insured person, whether a resident or non-resident, has entered into an insurance contract with an insurer and the insured property at the time of the marking of the contract is situated in Australia, or the insured event is one which can only happen in Australia, the premium paid or payable under the contract shall 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.

Subsection 142(1) of the ITAA 1936 will apply to premiums paid or payable to a non-resident insurer where:

• the insured property covered by the insurance contract is situated in Australia at the time of the making of the contract, or

• the insured events are ones which can only happen in Australia.

The use of the word 'or' in the subsection means the satisfaction of either condition will be sufficient for the subsection to apply.

'Insured property' is defined in section 141 of the ITAA 1936 to mean '…the property the subject of an insurance contract made or given by an insurer.'

'Insured event' is defined in section 141 of the ITAA 1936 to mean '…an event upon the happening of which the liability under an insurance contract arises.'

The insurance contract between Company X and Company A covers both insured property and insured events as defined by section 141 of the ITAA 1936.

Clauses of the insurance contract between Company X and Company A show that:

• The insurance contract provides coverage to Company A and its subsidiaries and interests without location limits. Coverage is also extended to any subsidiaries and interests that may come into existence during the term of the contract

• Unless specifically excluded or limited, coverage for loss or damage relating to insured property or insured events specified under the insurance contract is on a worldwide basis.

• Limitations or exclusions for insured property and insured events (with a limited number of exceptions) are not defined by location. Those clauses that limit or exclude liability for certain events or loss or property based on location relate to locations outside of Australia and do not result in the insurance contract covering only insured events which can happen only in Australia or insured property situated only in Australia at the time of the making of the contract.

Company X has received a premium under the insurance contract from Company A. The insurance contract does not apportion the premium to the extent to which insured property is situated in Australia at the time of the making of the contract, or to the extent that insured events can only happen in Australia. Neither does the contract provide for a method of apportioning the total premium on such a basis.

Section 142 of the ITAA 1936 does not provide for apportionment and there is no authority to apportion the total premium Company A paid to Company X. This means section 142 of the ITAA 1936 will only apply if the insurance contract covers only insured property situated in Australia at the time of the making of the contract and/or only covers insured events which can happen only in Australia. As this is not the case under the insurance contract, subsection 142(1) of the ITAA 1936 will not apply to any of the premium paid by Company A to Company X.

Subsection 142(2) of the ITAA 1936

Subsection 142(2) of the ITAA 1936 provides that:

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.

Therefore, for subsection 142(2) of the ITAA 1936 to apply, the following requirements must be satisfied:

• the insured person must be a resident of Australia, and

• an agent or representative of the insurer in Australia was instrumental in inducing the insured person to enter into the insurance contract to which the premium relates.

As noted above, Company A is the insured person for the purposes of section 142 of the ITAA 1936 under the insurance contract with Company X. Company A is not a resident of Australia for tax purposes.

Also as noted above, Company X is the relevant insurer for the purposes of section 142 of the ITAA 1936. No agent or representative of Company X was in any way instrumental in inducing the entry of Company A into the insurance contract.

Therefore as neither requirement has been satisfied, subsection 142(2) of the ITAA 1936 will not apply to any of the premium paid or payable by Company A to Company X.

Conclusion

In order for section 142 of the ITAA 1936 to apply to any of the premiums paid or payable by Company A to Company X, the requirements of either subsection 142(1) or subsection 142(2) need to be met. As the requirements of neither subsection have been satisfied, section 142 will not apply. Consequently, section 142 will not deem any of the premiums paid or payable by Company A to Company X as having an Australian source and will not include any of the premiums in Company X's assessable income.

In coming to our decision we have taken into consideration:

ATO Interpretative Decision ATO ID 2004/411 Income tax - income derived by non-resident insurer: property insurance where the properties covered are situated in Australia and other countries and the geographical location of the properties is not specified in the insurance contract but is known by the insurer

ATO Interpretative Decision ATO ID 2004/413 Income tax - income derived by non-resident insurer: liability insurance where the event may occur within or outside of Australia

ATO Interpretative Decision ATO ID 2004/414 Income tax - income derived by non-resident insurer: insurance for Australian properties and a global liability event

ATO Interpretative Decision ATO ID 2004/415 Income tax - income derived by non-resident insurer: insurance for an Australian liability event and global properties

ATO Interpretative Decision ATO ID 2004/416 Income Tax - income derived by non-resident insurer: insurance for an Australian liability event and an unrelated global liability event