Edited version of private advice

Authorisation Number: 1052140582905

Date of advice: 12 July 2023

Ruling

Subject: Apportionment of premiums paid under non-resident reinsurance arrangement

Question 1

By virtue of subsection 148(10) of the Income Tax Assessment Act 1936 (ITAA 1936), does section 148 of the ITAA 1936 apply in relation to the whole of Life Cover under the Policy, as reinsured by Australian Insurer with Non-Resident Reinsurer under the Reinsurance Treaty?

Answer

No.

Question 2

By virtue of subsection 148(10) of the ITAA 1936, does section 148 of the ITAA 1936 apply in relation to the whole of Terminal Illness Cover under the Policy, as reinsured by Australian Insurer with Non-Resident Reinsurer under the Reinsurance Treaty?

Answer

No.

Question 3

By virtue of subsection 148(10) of the ITAA 1936, does section 148 of the ITAA 1936 apply in relation to the whole of TPD Cover under the Policy, as reinsured by Australian Insurer with Non-Resident Reinsurer under the Reinsurance Treaty?

Answer

Yes.

Question 4

By virtue of subsection 148(10) of the ITAA 1936, does section 148 of the ITAA 1936 apply in relation to the whole of Accident Cover under the Policy, as reinsured by Australian Insurer with Non-Resident Reinsurer under the Reinsurance Treaty?

Answer

Yes.

Question 5

For the purposes of subsection 148(3) of the ITAA 1936, does the sum of the gross amounts of the premiums paid or credited by Australian Insurer to Non-Resident Reinsurer under the Reinsurance Treaty only include the premiums, or the portion of the premiums, that relate to the risks, or the parts of the risks, that are covered by subsection 148(10) of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

Years ending 31 December 20XX to 31 December 20XX

The scheme commenced on:

1 January 20XX

Relevant facts and circumstances

Australian Insurer

1.     Australian Insurer is an Australian-resident insurance company that is registered under section 21 of the Life Insurance Act 1995 (Life Insurance Act).

2.     Australian Insurer writes a number of group life insurance policies for various customers.

3.     Australian Insurer has entered into a number of reinsurance arrangements (including with non-resident reinsurers) to reinsure part of the risk carried by these group life insurance policies.

The Policy

4.     Australian Insurer issued a group life insurance policy (the Policy), which provides the following types of cover to its policy members (Member or Members, as applicable):

a.    life cover (Life Cover), which includes cover for terminal illness (Terminal Illness Cover); and

b.    Life Cover, together with cover for total and permanent disability (TPD) (TPD Cover).

5.     TPD Cover is only available together with Life Cover under the Policy.

6.     The Policy also offers accident cover (Accident Cover).

Life Cover

7.     Under Life Cover, if a Member dies while the Policy is in force, Australian Insurer will pay a death benefit for that person in accordance with the terms of the Policy (Death Benefit).

8.     Aside from the general exclusions specified in the Policy (General Exclusions), there are no further conditions specific to the Death Benefit to be paid under Life Cover. In particular, the Policy does not specify that the death of the Member must have been brought about by a specific cause. Therefore, provided that the Member's death was not caused by one of the General Exclusions, Australian Insurer will pay a Death Benefit in the event of the death of the Member.

Terminal Illness Cover

9.     Under Terminal Illness Cover, Australian Insurer will pay a benefit in accordance with the terms of the Policy where a Member suffers an illness which, in Australian Insurer's opinion, would reasonably be expected to reduce the life expectancy of the Member to less than a specified period (Terminal Illness Benefit).

TPD Cover

10.  TPD Cover applies to a Member who has elected to receive TPD Cover in addition to Life Cover.

11.  Under TPD Cover, if a Member suffers TPD while the Policy is in force, Australian Insurer will pay a TPD benefit for that person in accordance with terms of the Policy (TPD Benefit).

12.  The Policy includes descriptions of each of the specified set of circumstances under which a TPD Benefit will be paid (TPD Categories).

Accident Cover

13.  Under Accident Cover, a benefit will be paid where either TPD or death is caused by injury resulting from an accident (Accident Benefit).

14.  There are no additional premiums payable for Accident Cover under the Policy. Therefore, a Member will be covered for death and/or TPD under Accident Cover, in accordance with whether they have elected to be covered for Life Cover only, or for Life Cover together with TPD Cover.

The Reinsurance Treaty

15.  Australian Insurer and Non-Resident Reinsurer entered into a reinsurance agreement, under which Australian Insurer reinsures part of the risk of the Policy (the Reinsurance Treaty).

16.  Non-Resident Reinsurer is a non-resident for the purposes of section 148 of the ITAA 1936, and does not operate at or through a principal office, branch or other permanent establishment (as defined in subsection 6(1) of the ITAA 1936) in Australia.

17.  Pursuant to the Reinsurance Treaty, Australian Insurer has reinsured a part of the risk in relation to the following benefits payable under the Policy:

a.    Death Benefits;

b.    Terminal Illness Benefits;

c.     TPD Benefits; and

d.    Accident Benefits.

Election under subsection 148(2) of the ITAA 1936

18.  Australian Insurer has an existing election under subsection 148(2) of the ITAA 1936 for subsection 148(1) of the ITAA 1936 not to apply in respect of the income year ending 30 September 20XX (Election).

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 Division 15 of Part III

Income Tax Assessment Act 1936 section 148

Income Tax Assessment Act 1936 subsection 148(1)

Income Tax Assessment Act 1936 subsection 148(2)

Income Tax Assessment Act 1936 subsection 148(3)

Income Tax Assessment Act 1936 subsection 148(5)

Income Tax Assessment Act 1936 subsection 148(6)

Income Tax Assessment Act 1936 subsection 148(10)

Income Tax Assessment Act 1997 Division 320

Income Tax Assessment Act 1997 section 715-705

Income Tax Assessment Act 1997 subsection 715-705(1)

Income Tax Assessment Act 1997 subsection 715-705(3)

Income Tax Assessment Act 1997 subsection 715-705(4)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

All legislative references in these reasons for decision are to the ITAA 1936, unless stated otherwise.

Question 1

Summary

Section 148 does not apply in relation to the whole of Life Cover under the Policy, as reinsured by Australian Insurer with Non-Resident Reinsurer under the Reinsurance Treaty. Life Cover, as a whole, is not covered by subsection 148(10), as it does not relate to a benefit that is payable in an event mentioned in the definition of 'disability policy' under subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

Section 148

1.     Division 15 of Part III (Division 15) prescribes specific rules for assessing the income of non-resident insurers who do not have a principal office or branch in Australia.

2.     Section 148 (of Division 15) sets out the taxation treatment of reinsurance arrangements with non-resident insurers. Subsection 148(1) broadly ensures that, where a person carrying on the business of insurance in Australia (Australian insurer) reinsures out of Australia the whole or part of any risk with a non-resident (non-resident reinsurer), the premiums paid or credited in respect of the reinsurance are not:

a.     allowable deductions to the Australian insurer;[1] or

b.     included in the assessable income of the non-resident reinsurer.[2]

3.     In addition, any amounts recovered by the Australian insurer from the non-resident reinsurer in respect of a loss on any risk reinsured does not form part of the assessable income of the Australian insurer.[3]

4.     However, subsection 148(2) allows an Australian insurer who reinsures out of Australia the whole or part of any risk with a non-resident reinsurer to make an election so that subsection 148(1) does not apply in arriving at the Australian insurer's taxable income for any income years to which the election applies.[4] The effect of making an election is that the Australian insurer is essentially taxed on the non-resident reinsurance on the same basis as resident reinsurance.[5] That is, the Australian insurer can deduct the reinsurance premiums paid to non-resident reinsurers and includes reinsurance recoveries in its assessable income.[6]

5.     Where an Australian insurer makes an election under subsection 148(2):

a.     the Australian insurer is required to furnish returns, and pay tax as agent, for all non-resident reinsurers with whom it has reinsurance contracts;[7] and

b.     the Australian insurer is assessed, and is liable to pay tax as agent, on an amount equal to 10% of the sum of the gross amounts of the premiums paid or credited to non-resident reinsurers in respect of all such reinsurances in an income year to which the election applies, as if that amount were the taxable income of a non-resident company (not being a private company) not carrying on business in Australia by means either of a principal office or branch.[8]

Subsection 148(10)

6.     Subsection 148(10) provides:

Application to a life assurance company

            (10)    This section applies to a life assurance company in relation to the whole or a part of a risk if, and only if, the risk or that part of the risk:

(a)  is covered by a disability policy as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997; and

(b)  relates to a benefit that is payable in an event mentioned in that definition.

7.     Under subsection 6(1), 'life assurance company' has the meaning given to 'life insurance company' by subsection 995-1(1) of ITAA 1997, which means a company registered under section 21 of the Life Insurance Act. As Australian Insurer is registered under section 21 of the Life Insurance Act, it is a life assurance company for the purposes of subsection 148(10).

8.     Subsection 148(10) operates such that, where an Australian life assurance company undertakes reinsurance with a non-resident reinsurer, and the whole or a part of a risk does not satisfy the conditions in subsection 148(10), that risk, or that part of the risk, will not fall within the scope of section 148. The taxation of that risk (or that part of the risk) will instead be covered under Division 320 of the ITAA 1997, which provides the general taxation treatment for life insurance companies.

9.     Subsection 148(10) was inserted into section 148 by the Tax Laws Amendment (2004 Measures No. 2) Bill 2004 (2004 Bill). The Explanatory Memorandum to the 2004 Bill (EM) explains that the introduction of Division 320 into the ITAA 1997 unintentionally broadened the scope of section 148 and that, prior to its introduction, section 148 applied only to the 'accident and disability business' of life insurance companies.[9] The EM further explains that, as a result of the introduction of subsection 148(10), section 148 now only applies to the 'accident and disability risk', as opposed to the 'whole of the risk', covered by the relevant reinsurance contracts entered into by life insurance companies.[10]

'Disability policy' under subsection 995-1(1) of the ITAA 1997

10.  The term 'disability policy' is defined under subsection 995-1(1) of the ITAA 1997 to mean a 'life insurance policy' under which a benefit is payable in the event of:

(a)  the death, by accident or by some other cause stated in the contract, of the person whose life is insured (the insured); or

(b)  injury to, or disability of, the insured as a result of accident or sickness; or

(c)   the insured being found to have a stated condition or disease;

but does not include a contract of consumer credit insurance within the meaning of the Insurance Contracts Act 1984.

'Life insurance policy'

11.  Under subsection 995-1(1) of the ITAA 1997, 'life insurance policy' has the meaning given to the expression 'life policy' in section 9 of the Life Insurance Act, which provides:[11]

(1)  Subject to subsection (2), each of the following constitutes a life policy for the purposes of this Act:

(a)  a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;

...

(2)  A contract that provides for the payment of money on the death of a person is not a life policy if:

(a)  by the terms of the contract, the duration of the contract is to be not more than one year; and

(b)  payment is only to be made in the event of:

                                                (i)    death by accident; or

                                               (ii)    death resulting from a specified sickness.

12.  As the Policy includes Life Cover, it is a 'life policy' within the meaning of paragraph 9(1)(a) of the Life Insurance Act, on the basis that it is a contract of insurance that provides for the payment of money on the death of a person. Further, the Policy is not excluded under subsection 9(2) of the Life Insurance Act, as the duration of the contract is not limited to one year, and payment of a benefit under the contract is not limited to death by accident or death resulting from a specified sickness.

Contract of 'consumer credit insurance'

13.  Under subsection 11(1) of the Insurance Contracts Act 1984 (Insurance Contracts Act), 'consumer credit insurance' means insurance provided by a class of contracts of insurance:

(a)  that is declared by the regulations to be a class of contracts to which Division 1 of Part V of this Act applies; and

(b)  that is identified by those regulations as consumer credit insurance.

14.  'Consumer credit insurance' is defined under section 5 of the Insurance Contracts Regulations 2017 (Regulations), as follows:

For the purposes of paragraph (b) of the definition of consumer credit insurance in subsection 11(1) of the Act, the class of contracts referred to in section 27 of this instrument is identified as consumer credit insurance.

Note: For the purposes of paragraph (a) of the definition of consumer credit insurance (a class of contracts declared to be a class of contracts to which Division 1 of Part V of the Act applies), see section 27 of this instrument.

15.  Section 27 of the Regulations provides:

The following class of contracts of insurance is declared to be a class of contracts to which Division 1 of Part V of the Act applies, namely, contracts that provide insurance cover (whether the cover is limited or restricted in any way) in respect of:

(a) the death of the insured; or

(b) the insured:

(i) contracting a sickness or disease; or

(ii) sustaining an injury; or

(iii) becoming unemployed;

where:

(c) the insured or one of the insureds is a natural person; and

(d) the amount of the liability of the insurer under the contract is to be ascertained by reference to a liability of the insured under a specified agreement to which the insured is a party.

16.  The Policy does not satisfy paragraph 27(d) of the Regulations, as the amount of a benefit payable by Australian Insurer under the Policy is ascertained by reference to a formula (as specified in the Policy), rather than by reference to a liability of a Member under a specified agreement to which Australian Insurer is a party (including the premiums payable by the Member under the Policy). Therefore, the Policy is not a contract of 'consumer credit insurance' within the meaning of the Insurance Contracts Act.

'Under which a benefit is payable in the event of'

17.  Based on an ordinary reading of the definition of 'disability policy' in subsection 995-1(1) of the ITAA 1997 ('disability policy' definition), a life insurance policy will be a disability policy where a benefit under the policy is payable in the event of any one of the conditions specified in paragraphs (a) to (c) of the definition (paragraphs (a) to (c)).[12] In this regard, it is not necessary for the life insurance policy to satisfy all of the events specified in paragraphs (a) to (c).

18.  However, as a result of subsection 148(10), section 148 will only apply to a life assurance company in relation to the whole or a part of a risk, where that risk, or that part of the risk, is both covered by a disability policy, and relates to a benefit that is payable in one of the events mentioned in paragraphs (a) to (c). Accordingly, where a disability policy includes benefits that are payable in one (or more) of the events listed in paragraphs (a) to (c), in addition to other benefits which are not, the effect of paragraph 148(10)(b) is that it is only those risks, or those parts of the risks, that relate to a benefit that is payable in an event mentioned in paragraphs (a) to (c) that will be covered by section 148.

Application of the 'disability policy' definition to Life Cover

19.  Under Life Cover, if a Member dies while the Policy is in force, Australian Insurer will pay a Death Benefit for that person in accordance with the terms of the Policy.

20.  A life insurance policy will be a 'disability policy' for the purposes of paragraph (a) of the 'disability policy' definition, where a benefit is payable in the event of:

(a)  the death, by accident or by some other cause stated in the contract, of the person whose life is insured...[emphasis added]

21.  Relevantly, the word 'death' is qualified by the express inclusion of the words 'by accident or by some other cause stated in the contract' that appear thereafter. Therefore, based on an ordinary reading of these words, a life insurance policy will be a disability policy where the contract specifies that a benefit is payable in the event that the insured person dies as a result of an accident, or by some other cause that is expressly stated in the contract.

22.  By contrast, a life insurance policy will not be a disability policy where the contract does not expressly state a specific cause of death for a benefit to be paid. In other words, the circumstances that give rise to the payment of a benefit under such a policy do not include conditions in addition to the death of the insured person generally (such as a condition that the death was caused by accident or some other specified cause).

23.  Relevantly, the Policy does not specify that the death of the Member must have been brought about by a specific cause in order for a Death Benefit to be paid under Life Cover; the only condition required is the death of a Member generally.

24.  As the payment of a Death Benefit under Life Cover does not include any additional conditions that the death be caused by accident or some other specific cause as stated in the Policy, it is not a benefit payable in the event mentioned in paragraph (a) of the 'disability policy' definition. For completeness, paragraphs (b) and (c) of the 'disability policy' definition are equally not applicable, as they do not involve a benefit that is payable in the event of the death of the insured.

Application of section 148 to Life Cover

25.  As Life Cover, as a whole, does not relate to a benefit that is payable in an event mentioned in the 'disability policy' definition, the requirement in paragraph 148(10)(b) is not satisfied in relation to Life Cover. As a result, section 148 does not apply in relation to the whole of Life Cover under the Policy, as reinsured with Non-Resident Reinsurer under the Reinsurance Treaty. The taxation of reinsurance premiums and recoveries in respect of Life Cover will instead be covered under Division 320 of the ITAA 1997.

Question 2

Summary

Section 148 does not apply in relation to the whole of Terminal Illness Cover under the Policy, as reinsured by Australian Insurer with Non-Resident Reinsurer under the Reinsurance Treaty. Terminal Illness Cover, as a whole, is not covered by subsection 148(10), as it does not relate to a benefit that is payable in an event mentioned in the 'disability policy' definition.

Detailed reasoning

Application of the 'disability policy' definition to Terminal Illness Cover

1.     A Terminal Illness Benefit is payable under the Policy where a Member suffers any illness which, in Australian Insurer's opinion, would reasonably be expected to reduce the life expectancy of the Member to less than the period specified in the Policy.

2.     Paragraph (a) of the 'disability policy' definition is not applicable as a Terminal Illness Benefit is not paid in the event of the death of the Member.

3.     Paragraph (b) of the 'disability policy' definition is equally not applicable, as the injury to, or disability of, a Member is not an event under which a Terminal Illness Benefit is paid.

4.     Under paragraph (c) of the 'disability policy' definition, a life insurance policy will be a disability policy where a benefit is payable under the policy in the event of 'the insured being found to have a stated condition or disease'.

5.     As the words 'condition' and 'disease' are not defined for the purposes of the 'disability policy' definition, they may be interpreted according to their ordinary meaning.

6.     Importantly, the words 'condition or disease' in paragraph (c) are qualified by the word 'stated'. It can therefore be inferred that the legislature did not intend for contracts that provide a benefit on the insured being found to have a condition or disease generally to be covered. Accordingly, having regard to the ordinary meaning of these words, a life insurance policy will only be a disability policy (for the purposes of paragraph (c)) where the policy expressly states the specific condition(s) or disease(s) that the insured person must be found to have in order for a benefit to be paid.

7.     The Policy does not expressly state the specific types of illnesses in respect of which a Terminal Illness Benefit will be payable. In other words, a Terminal Illness Benefit will be payable under the Policy where a Member suffers any illness which, in Australian Insurer's opinion, would reasonably be expected to reduce the life expectancy of the Member to less than the specified period. Therefore, the conditions required for a Terminal Illness Benefit to be paid lack the specificity to amount to a 'stated condition or disease' for the purposes of the 'disability policy' definition.

8.     Accordingly, a Terminal Illness Benefit is not a benefit payable in an event mentioned in paragraph (c) of the 'disability policy' definition.

Application of section 148 to Terminal Illness Cover

9.     As Terminal Illness Cover, as a whole, does not relate to a benefit that is payable in an event mentioned in the 'disability policy' definition, the requirement in paragraph 148(10)(b) is not satisfied in relation to Terminal Illness Cover. As a result, section 148 does not apply in relation to the whole of Terminal Illness Cover under the Policy, as reinsured with Non-Resident Reinsurer under the Reinsurance Treaty. The taxation of reinsurance premiums and recoveries in respect of Terminal Illness Cover will instead be covered under Division 320 of the ITAA 1997.

Question 3

Summary

Section 148 applies in relation to the whole of TPD Cover under the Policy, as reinsured by Australian Insurer with Non-Resident Reinsurer under the Reinsurance Treaty. For the purposes of subsection 148(10), TPD Cover, as a whole, is both covered by a 'disability policy' within the meaning of the 'disability policy' definition, and relates to a benefit that is payable in an event mentioned in that definition.

Detailed reasoning

Application of the 'disability policy' definition to TPD Cover

1.     As set out in relation to Question 1 of this ruling, as the Policy includes Life Cover, it is a 'life policy' within the meaning of paragraph 9(1)(a) of the Life Insurance Act. As TPD Cover is only available together with Life Cover under the Policy, the entirety of the Policy is a 'life insurance policy' for the purposes of subsection 995-1(1) of the ITAA 1997.

2.     Further, as explained in Question 1 of this ruling, the Policy is not a contract of 'consumer credit insurance' within the meaning of the Insurance Contracts Act.

3.     As a TPD Benefit is not paid in the event of the death of a Member, paragraph (a) of the 'disability policy' definition is not applicable. Accordingly, the Commissioner has considered whether each TPD Category, as defined in the Policy, satisfies either paragraph (b) or (c) of the 'disability policy' definition, being a life insurance policy under which a benefit is payable in the event of:

...

(b)  injury to, or disability of, the insured as a result of accident or sickness; or

(c)   the insured being found to have a stated condition or disease;

...

Paragraph (b) of the 'disability policy' definition

4.     Under paragraph (b) of the 'disability policy' definition, a life insurance policy is a disability policy where a benefit is payable under the policy in the event of the 'injury to, or disability of, the insured as a result of accident or sickness'.

5.     As the words 'injury', 'disability', 'accident' and 'sickness' are not defined for the purposes of the 'disability policy' definition, they may be interpreted according to their ordinary meaning.

6.     Relevantly, in contrast to paragraphs (a) and (c) of the 'disability policy' definition, the words 'accident or sickness' in paragraph (b) are not qualified by a requirement that a specific type of accident or sickness is stated in the contract in order for a benefit to be paid. Therefore, based on an ordinary reading, a life insurance policy will be covered by paragraph (b) where a benefit is payable in the event of the injury to, or the disability of, the insured as a result of accident or sickness generally.

7.     Under the Policy, a TPD Benefit will be payable where the Member experiences a specified set of circumstances as described in each TPD Category. The Commissioner is satisfied that there are instances within each of the TPD Categories where it can be said that the TPD Benefit is payable upon the injury to, or disability of, the Member as a result of accident or sickness as required by paragraph (b) of the 'disability policy' definition.

8.     Accordingly, where a TPD Benefit is payable under any TPD Category upon the injury to, or disability of, the Member as a result of accident or sickness, paragraph (b) of the 'disability policy' definition will be satisfied. Where the injury to, or disability of, the Member is a result of something other than accident or sickness, then paragraph (b) of the 'disability policy' definition will not be satisfied.

Paragraph (c) of the 'disability policy' definition

9.     As set out in relation to Question 2 of this ruling, for the purposes of paragraph (c) of the 'disability policy' definition, a life insurance policy will be a disability policy where the policy expressly states the specific condition(s) or disease(s) that the insured person must be found to have in order for a benefit to be paid. Further, as the words 'condition' and 'disease' are not defined for the purposes of the 'disability policy' definition, they may be interpreted according to their ordinary meaning.

10.  Therefore, notwithstanding that paragraph (b) of the 'disability policy' definition will not be satisfied where a TPD Benefit is payable upon the injury to, or disability of, the Member as a result of something other than accident or sickness, the Commissioner considers that each TPD Category nevertheless constitutes a 'stated condition' for the purposes of paragraph (c) of the 'disability policy' definition.

11.  Specifically, each TPD Category explicitly outlines the specific set of circumstances pertaining to the nature and extent of the condition of the Member which must be found in order for a TPD Benefit to be payable. This can be contrasted to the situation where a benefit is payable under a life insurance policy upon the Member being found to have a condition (or disease) generally.

12.  Therefore, each TPD Category is covered by paragraph (c) of the 'disability policy' definition, on the basis that a TPD Benefit is payable in the event of the Member being found to have a stated condition.

Application of section 148 to TPD Cover

13.  As each TPD Category is covered by paragraph (c) of the 'disability policy' definition, the requirements in both paragraphs 148(10)(a) and (b) are satisfied in relation to TPD Cover, as a whole. Therefore, by virtue of subsection 148(10), section 148 applies in relation to the whole of TPD Cover provided by Australian Insurer under the Policy, as reinsured with Non-Resident Reinsurer under the Reinsurance Treaty.

Question 4

Summary

Section 148 applies in relation to the whole of Accident Cover under the Policy, as reinsured by Australian Insurer with Non-Resident Reinsurer under the Reinsurance Treaty. For the purposes of subsection 148(10), Accident Cover, as a whole, is both covered by a 'disability policy' within the meaning of the 'disability policy' definition, and relates to a benefit that is payable in an event mentioned in that definition.

Detailed reasoning

Application of the 'disability policy' definition to Accident Cover

1.     Under the Policy, an Accident Benefit is payable where death or TPD is caused by injury resulting from an accident.

2.     As Accident Cover includes two components - that is, death and TPD - the Commissioner has considered each component separately for the purposes of determining the application of the 'disability policy' definition to Accident Cover.

Accident Benefit payable upon death

3.     As set out at Question 1 of this ruling, a life insurance policy will be a 'disability policy' for the purposes of paragraph (a) of the 'disability policy' definition, where a benefit is payable in the event of:

(a)  the death, by accident or by some other cause stated in the contract, of the person whose life is insured...[emphasis added]

4.     Based on an ordinary reading of these words, a life insurance policy will be a disability policy where the contract specifies that a benefit is payable in the event that the insured person dies as a result of an accident, or by some other cause that is expressly stated in the contract. The word 'accident' is not defined for the purposes of the 'disability policy' definition and can therefore take its ordinary meaning.

5.     Accordingly, an Accident Benefit that is payable as a result of the death of the Member will satisfy paragraph (a) of the 'disability policy' definition, being a benefit payable in the event of the death, by injury resulting from an accident, of the Member. That is because for an Accident Benefit to be payable, it must be as a result of a specific cause as expressly stated in the Policy. By contrast, a Death Benefit will be payable under Life Cover upon the death of a Member generally, without the need for that death to have occurred as a result of a specific cause (as stated in the contract).

Accident Benefit payable upon TPD

6.     As set out at Question 3 of this ruling, a life insurance policy will be covered by paragraph (b) of the 'disability policy' definition where a benefit is payable in the event of the injury to, or the disability of, the insured as a result of accident or sickness generally.

7.     Question 3 of this ruling explains that each TPD Category involves a TPD Benefit being payable where a specific set of circumstances arise. In so far as these circumstances concern an injury to, or disability of, the Member as a result of accident or sickness, they were determined to satisfy paragraph (b) of the 'disability policy' definition. Here, an Accident Benefit is payable where the injury of the Member is as a result of an accident. Accordingly, the Accident Benefit will satisfy paragraph (b) of the 'disability policy' definition.

8.     For completeness, the Commissioner considers that an Accident Benefit that is payable in the event of TPD will also satisfy paragraph (c) of the 'disability policy' definition. As explained at Question 3 of this ruling, each TPD Category specified in the Policy constitutes a 'stated condition' for the purposes of paragraph (c).

Application of section 148 to Accident Cover

9.     As both components of Accident Cover satisfy the 'disability policy' definition, the requirements in both paragraphs 148(10)(a) and (b) are satisfied in relation to Accident Cover, as a whole. Accordingly, by virtue of subsection 148(10), section 148 applies in relation to the whole of Accident Cover provided by Australian Insurer under the Policy, as reinsured with Non-Resident Reinsurer under the Reinsurance Treaty.

Question 5

Summary

For the purposes of subsection 148(3), the sum of the gross amounts of the premiums paid or credited by Australian Insurer to Non-Resident Reinsurer under the Reinsurance Treaty only includes the premiums, or the portion of the premiums, that relate to the risks, or the parts of the risks, that are covered by subsection 148(10).

Detailed reasoning

Election under subsection 148(2)

1.     Subsection 148(2) allows an Australian insurer who reinsures out of Australia the whole or part of any risk with a non-resident reinsurer to make an election so that subsection 148(1) does not apply in arriving at the Australian insurer's taxable income for any income years to which the election applies.[13]

2.     Where an Australian insurer makes an election under subsection 148(2):

a.    the Australian insurer is required to furnish returns, and pay tax as agent, for all non-resident reinsurers with whom it has reinsurance contracts;[14] and

b.    the Australian insurer is assessed, and is liable to pay tax as agent, on an amount equal to 10% of the sum of the gross amounts of the premiums paid or credited to non-resident reinsurers in respect of all such reinsurances in an income year to which the election applies, as if that amount were the taxable income of a non-resident company (not being a private company) not carrying on business in Australia by means either of a principal office or branch.[15]

3.     Subsection 148(6) provides that an election for the purposes of section 148 shall:

a.     be made on or before the last day for the furnishing of the taxpayer's return of income of the income year in respect of which the election is first to apply, or within such further time as the Commissioner allows;[16]

b.     first apply in respect of an income year which shall be specified in the election;[17] and

c.     apply in respect of all subsequent income years.[18]

4.     Australian Insurer has an existing Election in respect of the income year ending 30 September 20XX.

5.     In accordance with subsection 148(6) and Taxation Determination TD 96/10[19], that Election applies in respect of reinsurance contracts commencing on or after 1 October 20XX. As the Reinsurance Treaty commenced after 1 October 20XX, the Election therefore applies to premiums paid or credited by Australian Insurer to Non-Resident Reinsurer under the Reinsurance Treaty.

Interaction between subsections 148(10) and 148(3)

6.     By virtue of subsection 148(10), section 148 will only apply to a life assurance company in relation to the whole or a part of a risk, if the risk, or that part of the risk, satisfies the requirements in subsection 148(10).

7.     Accordingly, in the context of a life assurance company, subsection 148(10) operates to limit the application of the provisions in section 148 to those risks, or the relevant parts of those risks, that are both covered by a 'disability policy' under subsection 995-1(1) of the ITAA 1997 and relate to a benefit that is payable in an event mentioned in the 'disability policy' definition. This is supported by the EM, which indicates that subsection 148(10) was enacted to confine the application of section 148 to 'accident and disability risk' as opposed to the 'whole of the risk' covered by the relevant reinsurance contracts entered into by life assurance companies.[20]

8.     Therefore, where an Australian life assurance company undertakes reinsurance with a non-resident reinsurer, and the whole or a part of a risk under the policy does not satisfy the conditions in subsection 148(10), that risk, or that part of the risk, will not fall within the scope of section 148.

9.     As explained above, where an Australian insurer makes an election under subsection 148(2), pursuant to subsection 148(3), the Australian insurer will be assessed and liable to pay tax as agent, on an amount equal to 10% of the 'sum of the gross amounts of the premiums paid or credited' by the Australian insurer in the income year to non-residents in respect of all such reinsurances.

10.  The explicit reference in subsection 148(10) to the 'whole or a part of a risk' necessarily means that, for the purposes of subsection 148(3), premiums that are paid or credited by the Australian insurer are required to be apportioned according to whether a risk, or part of the risk, covered by the relevant policy is covered by subsection 148(10).

Application to the Reinsurance Treaty

11.  In the context of the Reinsurance Treaty, it is only the premiums, or the portion of the premiums, paid or credited by Australian Insurer to Non-Resident Reinsurer that relate to the risks, or the parts of the risks, covered by subsection 148(10), that are included for the purposes of subsection 148(3). Accordingly, for the purposes of subsection 148(3), Australian Insurer will be required to apportion the premiums paid or credited to Non-Resident Reinsurer based on those risks (or the relevant parts of those risks) that are covered by subsection 148(10) and those that are not covered by subsection 148(10).

12.  As set out in Questions 3 and 4 of this ruling respectively, TPD Cover and Accident Cover are both, as a whole, covered by subsection 148(10). However, pursuant to Questions 1 and 2 of this ruling respectively, neither Life Cover nor Terminal Illness Cover fall within subsection 148(10).

13.  For the purposes of subsection 148(3), this means that Australian Insurer will be assessed and liable to pay tax as agent on an amount equal to 10% of the sum of the gross amounts of the premiums, or the relevant portion of the premiums, paid or credited to Non-Resident Reinsurer in respect of the Reinsurance Treaty to the extent that they represent premiums in respect of TPD Cover and Accident Cover only.

14.  As Life Cover and Terminal Illness Cover are not covered by subsection 148(10), subsection 148(3) does not apply in relation to the premiums, or the portion of the premiums, paid or credited by Australian Insurer to Non-Resident Reinsurer in respect of the Reinsurance Treaty that relate to Life Cover and Terminal Illness Cover. These premiums, or the relevant portion of these premiums, will instead be taxed under Division 320 of the ITAA 1997.

[1] Subparagraph 148(1)(a)(i).

[2] Subparagraph 148(1)(a)(ii).

[3] Paragraph 148(1)(b).

[4] Paragraph 148(2)(a).

[5] Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 2) Bill 2004, at paragraph 1.49.

[6] Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 2) Bill 2004, at paragraph 1.49.

[7] Paragraph 148(2)(b).

[8] Subsection 148(3).

[9] The EM, at paragraph 1.50.

[10] The EM, at page 17, 'Comparison of key features of new law and current law'.

[11] A 'life insurance policy' under subsection 995-1(1) of the ITAA 1997 also explicitly includes: (a) a contract made in the course of carrying on business that is 'life insurance business' because of a declaration in force under section 12A or 12B of the Life Insurance Act; and (b) a sinking fund policy within the meaning of the Life Insurance Act.

[12] Provided that the life insurance policy is not a contract of 'consumer credit insurance' within the meaning of the Insurance Contracts Act.

[13] Paragraph 148(2)(a).

[14] Paragraph 148(2)(b).

[15] Subsection 148(3).

[16] Paragraph 148(6)(c).

[17] Paragraph 148(6)(d).

[18] Paragraph 148(6)(e).

[19] Full title: Taxation Determination TD 96/10 Income tax: general insurance: when an election is made under subsection 148(2) of the Income Tax Assessment Act 1936 ('the Act'), are all amounts paid or credited or received or debited in respect of reinsurance contracts made prior to the making of the election, deductible or assessable respectively to the Australian insurer?.

[20] See the EM, at paragraph 1.50 and page 17, 'Comparison of key features of new law and current law'.