Taxation of Life Insurance Companies
21.140. Life insurance companies are the subject of a special tax regime under Division 8 of Part III of the Act. The underlying approach is that the company is taxed on its investment income; but the fact that this is not the only possible approach to taxing life insurance companies is illustrated by the diversity of practice in other countries and, indeed, the diversity that existed in Australia before the introduction of the principle of uniform taxation legislation in 1936.
21.141. Prior to 1936 life insurance companies were taxed on the basis of their investment income under Commonwealth, New South Wales and Western Australian legislation. In Victoria, Queensland and Tasmania they were taxed on a percentage of premium income, while in South Australia the taxable income was based on the amount of the company's actuarial surplus. All these methods, and others, are in use overseas and a brief summary of some of them is contained in paragraphs 21.150–21.157 below.
21.142. Since 1936 all life insurance companies have been taxed on a basis that owes its origin to the pre-1936 Commonwealth legislation. This followed the recommendation of the Ferguson Commission (1932–34).
21.143. The assessable income of a life insurance company, in respect of its life insurance business, comprises its investment income. Dividends are included in assessable income, though resident life insurance companies are entitled to the rebate of tax thereon provided by section 46. Premiums received in respect of policies and considerations received in respect of annuities are excluded from assessable income under section 111 but form part of the total income of the company for the purpose of determining certain deductions. Furthermore, subject to compliance with the 30/20 requirements, that portion of investment income referrable to superannuation policies is exempted by virtue of section 112A.
21.144. The main deductions allowed in computing the taxable income of a life insurance company are as follows:
- (a) A deduction under section 51 (1) for expenses directly incurred in earning the assessable (investment) income. These are usually a small part of the total expenses of a life insurance company.
- (b) A proportion of the ‘expenses of general management’ of the company. The practical effect of section 113 is to allow a deduction of the proportion of those expenses which is equal to the proportion that the assessable income of the company bears to the total income of the company. Expenses incurred wholly in gaining or producing non-assessable income (primarily salary and commission to salesmen) are specifically excluded from the definition of ‘expenses of general management’, as are expenditure of a capital nature and expenditure incurred in producing assessable income.
- (c) A deduction is allowed in full under section 82AAC of contributions to superannuation and pension funds.
- (d) A deduction is allowed under section 115 of a percentage of the ‘calculated liabilities’ of the company. This is a controversial deduction and is further considered in the next paragraph.
-
― 377 ―
(e) Rebates of tax are granted to resident life insurance companies on dividends (under section 46) and a rebate of 10 per cent is granted under section 160AB on interest received on certain Australian and State Government securities issued before 1 November 1968.
21.145. The Ferguson Commission stated in paragraph 858 of its Report:
‘In our opinion a life assurance company should be taxed on the basis of its investment income, which cannot be correctly determined without providing for the interest assumed to be earned on the investments set aside to provide for the payment of the liabilities of the company to its policy holders.’
The Report noted that this principle had already been conceded under Commonwealth legislation, by an amendment made in 1933. The recommendations of the Ferguson Commission were subsequently adopted and a deduction of 4 per cent of the calculated liabilities of a life insurance company was allowed. This figure was reduced to 3 per cent in 1942 when the income tax field was taken over wholly by the Commonwealth. The figure remained at 3 per cent until the 1973–74 Budget which reduced it to 2 per cent and made certain other changes that had the effect of greatly increasing the amount of tax paid by life insurance companies. The figure was further reduced to 1 per cent in the 1974–75 Budget, with the inference that the deduction would be removed completely in the near future.
21.146. Finally, section 116 of the Act provides that a life insurance company shall not be liable to pay income tax in respect of the income derived by it from business of life insurance if its calculated liabilities exceed the value of all its assets.