In New South Wales, rules relating to duty payable on life insurance policies are set out in Part 2 of Chapter 8 of the Duties Act 1997 (NSW) (Duties Act). The amount of duty chargeable on term insurance policies is 5% of “the first year’s premium” on the policy. “Premium” is defined to mean “the total consideration given to an insurer by or on behalf of the insured person to effect insurance without deductions for any amounts paid or payable, or allowed or allowable, by way of commission or discount to an insurance intermediary”.
The facts
ERIC Insurance Ltd (Taxpayer) carried on the business of providing insurance to New South Wales residents. As part of this business, it issued life insurance policies for a term of years where premiums were paid upfront on or before the issue of the policy for the term of the policy. The Taxpayer
paid duty on the life insurance component of its various policies on the basis that “the first year’s premium on the policy” was the amount of premium referable only to the first year on a pro rata basis of the total premium. The case turned on whether, in circumstances where the premium for the entire term of a term insurance policy is paid up-front, the words “the first year’s premium” mean:
- the premium referable or attributable to the first year of the policy, as the Taxpayer had done; or
- the total consideration received by the applicant during the first year of the policy to effect the term insurance, as the Commissioner argued.
First year premium: Amounts attributable to the first year
The Tribunal agreed with the Taxpayer that the words “the first year’s premium” meant the amount of premium attributable to the first year, not the total sum paid in the first year of the policy.
The Tribunal considered case law that evidenced courts had previously recognised that as a matter of commercial practice, insurers charged a single premium for different policies and types of insurance, and for various time periods, and thus have apportioned income tax and stamp duty liability accordingly. The Tribunal interpreted the decisions in showing that apportionment was adopted because the true actuarially established premium for life insurance could be calculated and that even where actuarial material is unavailable, provided there is a reasonable basis for calculation, apportionment was still available.
The Tribunal proceeded to consider the meaning of “first year’s premium” in the context of Chapter 8 of the Duties Act, which provides rates of duty according to types of insurance. The Tribunal’s interpretation of the language of the provision was that the words “first year” relate to the immediately following words, “premium on the policy”, which favoured an interpretation that duty is payable on so much as could be attributed to the first year as opposed to the total paid in the first year.
The Tribunal considered that if it had been the legislature’s intention for those provisions to have the effect submitted by the Commissioner, the wording could have been drafted to refer to the premium paid. We understand that the Commissioner has decided not to appeal this decision.
If you would like to view any other articles in Global Insurance Focus - November 2016 please click on the links below:
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