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Chapter 34: Building a more consistent regime for life insurers

A case for reform

For taxation purposes, the different types of business of life insurers are split into different classes.
Life insurers are required to undertake complex calculations to determine taxable income for each class.
The complexity also opens up opportunities for ‘tax planning’.

The income tax base does not include all income, which results in inequities and inefficiencies in the financial markets.

The taxation treatment is inconsistent with the taxation treatment of other entities which again can lead to distortions in decisions by investors and financial institutions.

A strategy for reform

In accordance with the proposed new entity regime:

  • apply the company tax rate to taxable income; and
  • implement the redesigned imputation system.
Key policy issues

Calculation of taxable income

Application of the company tax rate

Application of the imputation system

How should taxable income be calculated? Can accounting principles be used for taxation purposes? How should the profit on immediate annuity business be determined? How would life reinsurance be taxed? What are the tax rate implications for the superannuation and deferred annuity businesses of life insurers? How would franking credits be allocated between shareholders and policyholders? What franking account adjustments need to be made in relation to existing policies?
Option 1
Include premiums in assessable income.

Option 2
Identify components of assessable income.

Option 3
A combination of the above.

Use/adjust value of policy liabilities calculated for accounting or regulatory purposes.

Depends on type of annuity:
- allocated annuities;
- fixed-term annuities; and
- lifetime annuities.

Using the same principles that would apply to tax life insurance.
- Implications for super business — the mechanism to provide early refunds of excess imputation credits would ensure that amounts assigned to policies held by CSFs would continue to be taxed at 15 per cent.
- Implications for DA business — existing business could be transferred to CSFs or ADFs or transitional arrangements could apply to continue to tax amounts assigned to existing DA policies at the rate of 15 per cent.
Option 1
Allocate on the same basis that tax
is allocated between shareholders and policyholders for regulatory purposes.

Option 2
Allocate on the same basis that investment income is allocated between shareholders and policyholders.

Depends on whether the current tax treatment or the redesigned imputation system applies to bonuses paid to policyholders on existing policies.