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Remedial matters

Technical changes to the life insurance transitional rules

(Clauses 2(16), 26 and 27)

Summary of proposed amendments

Technical changes are proposed to the application and effect of the transitional rules for life insurance policies sold before the commencement date of the reforms to the taxation of life insurance in 2010.

The changes affect both profit participation policies and life risk policies.

Application date

The proposed changes apply from 1 July 2010, or earlier at the life insurer’s election for an income year that includes 1 July 2010.

Key features

The changes:

  • Clarify that a simplified method for taxing profit participation policies (sold before 30 June 2009) continues to apply if those policies are later transferred or sold to another life insurer and certain conditions continue to be met. Consequential changes are also proposed 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 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 would need to occur within 90 days from when the life insurer receives notice of the cancellation.
  • Remove ambiguities about how the transitional rules apply to life reinsurance contracts.

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.

Ongoing 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. Many of these issues are connected with the range and variation of life products on offer and the legal nature of the policies sold.