Treasury has released a consultation paper on the tax impacts of implementing the new accounting standard for insurance contracts (AASB17) which provides a consistent accounting treatment of all insurance contracts. AASB17 adopts the new international standard for insurance companies: IFRS17.

The tax implications, from a change in accounting standards are as follows.

  • First, the ITAA97 provides different regimes for taxing life insurers (Div 320) and general insurers (Div 321). They are different and yet the accounting standards are going to be the same.
  • The Div 321 regime broadly mirrors its accounting income and expenses, and yet this is changing.
  • Health insurance is really a form of general insurance, and yet there is no special regime for it (this form of insurance is still assessed on general tax principles).
  • For largely historical reasons, the accounting, tax and prudential standards in each insurance sector interact differently.

The new accounting standard will apply for annual reporting periods beginning on or after 1 January 2021 but some companies can chose to adopt it early (if they apply with AASB9 and AASB15).

The primary objective of this consultation is to obtain further information and data on the tax impacts of implementing AASB17 to inform the Government’s consideration of whether and what changes may be needed to the tax law as a consequence.

Also, consideration of the tax implications of AASB17 also provides an opportunity to seek comments on two other insurance taxation issues that relate to the operation of the current provisions:

  • Firstly, whether the tax law for health insurers should be codified rather than relying on the ordinary principles; and
  • Secondly, whether the law should specify how to calculate outstanding claims liabilities for general insurance companies.

    Further consultation will occur on the details of any change if it is determined that there is a need to amend the tax law.

SUBMISSIONS are due by 31 January 2019.

By way of background:

  • Life insurance companies are taxed under Division 320 of the Income Tax Assessment Act 1997 (ITAA1997). Division 320 was introduced in 2000 as part of the then Government’s response to the Ralph Business Taxation Review. It ensures that the various streams of income earned by life insurers are taxed in a comparable way to other entities with similar types of income. That is:
    • the risk business of a life insurer is taxed on a similar basis as for general insurers;
    • the investment business is taxed on a similar basis as other investment entities; and
    • complying superannuation investment income is taxed like superannuation funds.
    • Annuity investment income is exempt from tax, to the extent it is attributable to policyholders, like the pension phase of a superannuation fund,
    • with any shareholder margin being taxable.
    • Before the introduction of Division 320, the tax regime for life insurers was very complex. Income and expenses were allocated to up to four classes of business. Each class was subject to different calculations to assemble assessable income and different tax rates also applied.
  • General insurance companies are taxed under Division 321 of the ITAA1997, which takes into account their business model.
    • Broadly, the assessable income and deductions flowing from a general insurance company’s underwriting results mirror its accounting income and expenses, with some timing differences.
    • The tax provisions for general insurance companies were initially inserted in 2002 as Schedule 2J of the Income Tax Assessment Act 1936  (ITAA1936) and codified the methodology in Taxation Ruling IT2663.
      • This ruling outlined how outstanding claims were calculated and deducted and how premium income was returned as assessable income.
      • While it had applied since the 1991- 92 income year, a law change was required following the High Court of Australia’s refusal to grant the Commissioner of Taxation special leave to appeal against the Full Federal Court’s decision in the Commissioner of Taxation v Mercantile Mutual Insurance (Workers Compensation) Ltd case and Commissioner of Taxation v Mercantile Mutual Insurance (Australia) Ltd case.
    • In 2010, as part of a rewrite of the income tax law, the provisions in Schedule 2J to the ITAA1936 were rewritten to Division 321 of the ITAA1997.

FJM 24.11.18

[Treasury website: Consultation Page, Discussion Paper; LTN 214, 6/11/18; Tax Month – November 2018]


CPD questions (answers available)

  1. Is a new accounting standard: AASB17 been promulgated, treating life insurance and general insurance contracts the same way?
  2. Are the tax regimes for life and general insurance currently the same?
  3. Has Treasury issued a discussion paper about the tax implications of this new accounting standard?
  4. What is the primary objective of this discussion paper?
  5. What is the objective, so far as the taxation of Health Insurance, is concerned?




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