The, Minister for Financial Services and Regulation, Joe Hockey MP, today announced that the Government will introduce amendments to the taxation law to facilitate the transfer of assets and liabilities of resident life insurance companies under Part 9 of the Life Insurance Act 1995 (Part 9 transfers) that take effect on or after 1 July 2000.
Other amendments will ensure that where life insurance companies transfer assets after 30 September 2000 to support some or all of a liability that existed before 1 July 2000, the assets will be treated as having been sold and repurchased.
Transfer of life insurance businesses under Part 9 of the Life Act
The amendments relating to Part 9 transfers will ensure that assets that are transferred under a Part 9 transfer -will be taxed on a basis that is broadly consistent with the current CGT group rollover provisions of the Income Tax Assessment Act 1997 (ITAA 1997). The amendments will also ensure that no tax consequences arise when risk policy liabilities are transferred under a Part 9 transfer.
These new rules will only apply to resident life insurance companies that are members of a wholly owned group if the conditions for relief are satisfied.
Broadly, there will be no bringing forward of a CGT event when life insurance companies within a wholly owned group transfer their life insurance business under a Part 9 transfer. Other changes are necessary to ensure any subsequent CGT events in relation to any assets and liabilities transferred receive appropriate tax treatment.
Conditions for Part 9 transfer relief
The transferor company will be able to choose which assets and liabilities it wants to transfer to the transferee company. However, to qualify for relief, the following conditions must be met:
- the Part 9 transfer that is approved by the Court or by the Australian Prudential Regulation Authority (APRA) must be supported by documentation that specifies the assets and liabilities within each segregated pool (ie the virtual pooled superannuation trust (VPST) and the segregated exempt assets (SEA)) of the transferor company at the time of transfer and the total assets and liabilities transferred. It must also specify where the assets and liabilities are transferred to within the transferee company;
- any assets or liabilities that are included in the Part 9 transfer must be transferred at the same time directly into the same segregated pool within the transferee company. For example, assets and liabilities held in the VPST of the transferor company must be transferred to a VPST of the transferee company; and
- the total transfer value of assets transferred from and to the VPST and SEA must equal the sum of the transferor companys liabilities transferred to each segregated pool plus any reasonable provision for any liability for tax on unrealised gains that was made by the transferor company immediately before the transfer that relates to the assets transferred to the extent that the provision was transferred to the segregated pool of the transferee company under the Part 9 transfer.
Nature of Part 9 transfer relief
If a Part 9 transfer satisfies all of the conditions outlined above, any capital gains or capital losses from the CGT event happening on the transfer of the assets and liabilities will be disregarded.
Where the transferor company transfers an asset and it has been certified under Division 320 of the ITAA 1997 that parts of the asset are to be treated as separate assets for the purposes of the life insurance provisions and each part of the asset is transferred to the corresponding segregated pool of business of the transferee company, the parts included in the original certification by the transferor company will continue to be treated as separate assets for the purposes of the life insurance provisions.
Consequences of relief
The current grouping and loss integrity rules in the ITAA 1997 will apply as follows:
- the loss transfer rules in Division 170 will be extended to apply to the VPST;
- as assets with unrealised capital losses are transferred under CGT rollover, Subdivision 170-D will not apply to them. To prevent duplication of these unrealised losses on group company interests in the transferor, these losses will be treated as transferred realised losses for the purpose of making anti-duplication reductions under Subdivision 170C. These reductions will be required only where the unrealised losses are reflected in the value of the interests; and
- the value shifting rules in Division 138 will have their ordinary operation in respect of transferred assets. The income tax law will be clarified to ensure that a liability assumption is taken into account in determining whether value has been shifted from the transferor.
The transferor company will only be able to transfer VPST losses to the VPST of the transferee company. The existing loss quarantining rules in Division 320 will then apply to any VPST losses transferred.
If the transferor company transfers any liabilities relating to its risk policies, the transferor company will not include the change in the value of its risk policy liabilities that arises as a result of the Part 9 transfer in its assessable income or allowable deductions .Similarly, the transferee company will not include this change in value in its assessable income or allowable deductions. In addition, if under the Part 9 arrangement, the transferor company transfers all of its continuous disability policies together with the liability under the net risk components of these policies that related to the change in the valuation method used to value these policies, the transferee company will include in its assessable income the same amount that the transferor company would have included if that amount was not transferred.
The transferor company can transfer under a Part 9 transfer a life insurance policy that was constituted by a contract that was made before 1 July 2000. Provided the transferee company does not restructure the policy or change the fee structure it will be treated for the purposes of section 320-40 of the ITAA 1997 as a pre 1 July 2000 policy of the transferee company.
If the transferor company has not segregated assets to support all of the liabilities relating to its VPST policies or exempt life insurance policies transferred to the transferee company, and the transferee company subsequently transfers assets to its segregated pools to support the liabilities transferred, the provisions relating to the consequences of the deemed sale and repurchase of an asset in Division 320 of the ITAA 1997 will apply. However, the transferee company will not include in its VPST component, or be able to claim a deduction for, the transfer value of the assets transferred.
Assets not segregated before 1 October 2000
Life insurance companies had until 1 October 2000 to transfer assets into their VPST or SEA to meet any liabilities relating to VPST policies or exempt life insurance policies that existed before 1 July 2000 without any tax consequences. If life insurance companies transfer assets to a VPST or SEA after 30 September 2000 to meet some or all of these liabilities, the provisions relating to the consequences of the deemed sale and repurchase of the asset in Division 320 of the ITAA 1997 will apply. However, the company will not include in its VPST component, or be entitled to a deduction for, the transfer value of the assets transferred.