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Inland Revenue

Tax Policy

Changes to the taxation of insurance business

(Clauses 2(6) and (13), 32, 33, 36, 44 to 54, 87, 100, 101 and 103(44) to (46) and (54))

Summary of proposed amendment

A number of technical remedial changes are proposed to the treatment of general and life insurance business conducted in New Zealand. They clarify various aspects of the taxation rules applicable to general and life insurers.

Application date

Various dates will apply. These are outlined in the section titled “Detailed analysis”.

Key features

The changes:

  • confirm entitlements under section DR 4 of the Income Tax Act 2007 that life insurers have in respect of claiming a deduction for the life-risk component of life insurance claims tied to reserves that form part of any acquired or transferred insurance business;
  • establish, under sections DW 4 and EY 5, a method for calculating an opening balance for life and general insurance reserves when the business is transferred into New Zealand;
  • alter the formula in sections EY 17 and EY 21 which allocates income between a life insurer’s policyholder and shareholder tax base. (a number of consequential amendments result from the proposed change); and
  • clarify the relationship between sections EY 15 and EY 19 when apportioning investment income from savings product policies between a life insurer’s policyholder tax base and shareholder tax base.

The remaining amendments are technical or consequential in nature.


The Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 made significant changes to the way the Income Tax Act 2007 applied to the life insurance business in New Zealand. Changes were also made to the rules affecting the deduction of insurance claims for general insurers.
The changes proposed in this bill are part of a programme to ensure that the changes to the taxation of life insurance and general insurance, enacted by the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009, work as intended. The changes therefore largely confirm or clarify existing policy settings.

Detailed analysis

Reserves – impact of the capital limitation on deduction of claims paid on transferred life insurance business (clause 33(2) and (3))

Section DR 4 of the Income Tax Act 2007 is being amended to ensure that expenditure for claims related to life-risk connected with the outstanding claims reserve is deductible. Concerns had been raised that the operation of case law in connection with business transfers could have the effect of preventing life insurers from claiming a deduction in connection with meeting an insurance claim for life-risk for life policies connected with a newly acquired block of life insurance business. The change applies from 1 July 2010 or earlier income years that include 1 July 2010.

Reserves – setting an opening balance for reserves when general and life insurance business is transferred from non-residents to New Zealand insurers (clauses 36 and 44)

Sections DW 4 and EY 5 of the Income Tax Act 2007 are being amended to set out the calculation of an opening balance for reserves for insurance business that is being transferred by a non-resident to a New Zealand-resident insurer. The proposed new rules will require the New Zealand-resident to base the opening value on the closing balance of the non-resident business on the assumption that the non-resident was in fact a New Zealand tax resident. The concern is that insurance business could be transferred from a jurisdiction that does not have a similar commercial or tax regulatory environment and entitlements or taxable income could be over or understated. The change applies from the date of the first financial quarter following the enactment of the bill; this date is most likely to be 1 January 2014.

Profit-participation policies – allocation of income between the policyholder tax base and the shareholder tax base (clauses 46, 49 to 54 and 103(44) to (46) and (54))

The formula in section EY 17 of the Income Tax Act 2007 is being amended by substituting the term “present value (net)” with the term “present value (actuarial net)”. The purpose of the change is to ensure that the claim the shareholder base has on future income derived on investment income is correctly valued. A similar change is being made to section EY 21.

The term “present value (actuarial net)” is defined in section YA 1 to be an actuarially determined discount rate based on the expected market returns (actual and assumed), or the face value of the discount period is less than a year. The discount-rate used should be same as the one used by the life insurer for financial reporting purposes.

To accommodate the change, consequential changes are being made:

  • The term “present value (gross)” is being replaced with “risk-free (gross)” in section EY 24.
  • The term “present value (net)” is being replaced with “risk-free (net)” in sections EY 28, EY 29, EZ 56 and EZ 57.

These changes apply from 1 July 2010 and earlier income years that include 1 July 2010.

Policyholder base income – non participation policies (clause 45)

Section EY 15 is being amended to clarify its relationship with section EY 19. Section EY 15 defines the income that should be allocated to the policyholder base. Section EY 15(2) specifies that policyholder income is limited to the amount provided for in the formula set out in that section. Any excess income becomes shareholder base income under section EY 19. The change applies from 1 July 2010 or income years including 1 July 2010.

Other remedial changes

Clause Clarification changes Reason Application date

Life insurance outside New Zealand

The colon “:” is being replaced with an “and” in section DR 3.

Improve the logic and interaction of the source rule in section EY 48. From enactment of the bill.

Deduction for reserves

Deductions under section DR 4 are being defined in the context of non-participation policies.

To improve the linkages between the rules for non-participation policies and the deduction rule in section DR 4. From enactment of the bill.
47, 48

Incorrect cross-references to reserves

Cross-references in sections EY 19(3) and EY 20(2) are being fixed. Both sections refer to sections EY 23 to EY 29. The reference is being changed to sections EY 23 to EY 27.

Improve the internal consistency of the Income Tax Act 2007. From enactment of the bill.

Policyholder credit account

Section LR 1 is being repealed.

The operation of section LR 1 is contingent on the effect of a number of memorandum accounts that were repealed when the new life insurance rules took effect. The section no longer has any effect and is being removed. From the 2014 income year.
100, 101

Timing of debit entries to the imputation credit account

Sections OB 47 and OP 44 are being amended to clarify the consequences when an imputation credit in the imputation credit account of a life insurer is lost because continuity of shareholding is not maintained. The amendment provides that no debit arises at the end of the year.

Under current law the debit entry is required at the time of the breach or the end of the tax year 31 March. At worst, the law could require two debit entries for the same breach in continuity. From 1 July 2010 or earlier income years including 1 July 2010.