Remedial changes to the taxation rules for life business

Sections EY 28, EY 30 and YA 1 of the Income Tax Act 2007

Technical changes have been made to the transition rules supporting the 2009 life insurance tax reforms.

Background

Changes to the taxation of life insurance business, enacted by the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009, included a set of transitional rules designed to grandparent life insurance policies sold before the date the new rules started. Grandparented life policies are eligible for relief that preserves, for a limited period, the application of the previous life taxation rules. Subsequent taxation bills have amended aspects of the transitional rules to remove uncertainties and deal with practical problems identified by life insurers.

On-going consultation with life insurers about the effect of the taxation reform has continued to identify a number of remedial, and often technical, issues with the operation of the transitional rules. The amendments made by this Act, the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 deals with issues connected with profit participation policies, restoration of cancelled life risk policies, and life reinsurance contracts.

Key features

The changes:

• Clarify that the simplified method that applies to "existing business", as defined by section EY 28, continues to apply to profit participation policies that are transferred or sold to another life insurer. "Existing business" is defined as a profit participation policy that was sold before 30 June 2009, or a policy sold after that date if it replaces an earlier participation policy and provides for substantially the same terms and conditions. Changes made by the Finance and Expenditure Select Committee also ensured that any increase in premiums payable for the transferred profit participation policy, provided that the increase is no greater than the higher of the CPI rate or 10%, will not result in it being removed from the definition of "existing business".  
• Consequential changes have also been made to section EY 30 to preserve transitional relief available to life-risk policies in the event those policies are sold or transferred to another life insurer.
• Clarify that transitional relief under section EY 30 continues to apply to life-risk policies that are cancelled by the policyholder but later restored by the life insurer on the same terms and conditions. The restoration needs to occur within 90 days from when the life insurer receives notice of the cancellation.
• Remove ambiguities about how the transitional rules in section EY 30 apply to life reinsurance contracts. Life reinsurers can claim transitional relief on life reinsurance policies that were in force before the new life insurance rules started on 1 July 2010 or earlier at the life insurer's election, to the extent that the underlying life insurance policy is or could be grandparented.
• Remove the definition of "life insurance rules" from the Income Tax Act 2007. Following the changes made to the taxation of life insurance business in 2009, the definition was redundant.

Application date

The changes apply from 1 July 2010. Life insurers have the option to apply the rules from the beginning of their income year, if that year includes 1 July 2010.