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Inland Revenue

Tax Policy

PUBLISHED 22 November 1999

Legislative changes to life insurance tax rules?

As recently reported in the media, Inland Revenue's actuarial reserving project may reveal the need for changes to the life insurance tax rules in the Income Tax Act 1994. Policy Advice General Manager Robin Oliver notes that any proposed law changes emerging from the review would have to be part of the priority-setting process of the Government's tax policy work programme. And one of the top priorities for the new Government will be to decide on the tax policy work programme for the next three years, he says. For further information on the project see Inland Revenue's statement, Actuarial Reserving Project.

Background to Life Regime

The current life insurance tax regime has applied since the 1991 income year. Income tax is calculated on the life base and policyholder base. Tax paid on the life base can be credited against the policyholder base through an imputation mechanism.

The life insurance tax rules are complex. Actuaries determine the level of policyholder actuarial reserves and the assumptions underlying the components of underwriting profit. The calculation of the policyholder reserve is a fundamental aspect of the tax regime. The underwriting income (mortality profit, premium loading and discontinuance profit) is calculated by reference to complex actuarial formulas and is included in both tax bases.

Section CM 8 of the Income Tax Act 1994 sets out in general terms the calculation requirements and allows for the Commissioner to seek external actuarial advice, from the Government Actuary or other actuary, in reviewing the reserves and enables the Commissioner to amend the reserve.

What is the aim of the Project?

The actuarial reserving project is a review of the actuarial reserving practices of life insurers adopted for income tax purposes and the implications for the life and policyholder tax bases.

The project is being undertaken by the Insurance & Superannuation Portfolio of Corporates and is part of Inland Revenue's normal compliance activity.

The project is looking at a number of areas, including current reserving practices and implications arising from the introduction of Financial Reporting Standard No. 34 which uses the margin on services method (applies to accounting periods ending on or after 31 December 1999).

The overall aim of the project is to determine, with external consultation, the appropriate reserving basis and to inform the industry accordingly.

How is the aim being achieved?

The Government Actuary is providing external actuarial advice as the review covers a highly complex and specialised area.

The project has now passed its preliminary stage. This has involved informing the relevant bodies of the review and developing a process for future discussions.

Inland Revenue has briefed the Board and Tax Committee of the Investment Savings & Insurance Association, members of the NZ Society of Actuaries at recent sessional meetings, and the life insurance tax managers and their advisors at the Australasia Conference on Financial Services Taxation held recently in Australia.

At that Conference the Government Actuary also presented a paper on the Life Insurance Taxation basis. Potential issues identified included whether a reasonable reserving basis is a gross premium valuation including provision for future expected profit distributions to policyholders; whether provision should also be included for future shareholder transfers; and whether allowance for lapses and surrenders can be considered appropriate. Paul Rhodes of Tacit Group responded to the issues in a paper he presented.

Inland Revenue plans to hold discussions with relevant bodies, including the NZ Society of Actuaries, and if appropriate issue a standard practice statement on the application of the life rules. Out of this process the need for remedial legislation may emerge, which will be considered as part of the overall tax policy work programme priorities. It is anticipated this will be completed by 31 December 2000, however this will depend on a number of factors.

The issues covered by the project are also being reviewed as part of audits. The audits will follow their own timeframes and disputes arising will be addressed through the disputes resolution process.