Income tax amendments relevant for general insurance contracts becomes law

With the recent passage through Parliament on June 25, 2024, and subsequent Royal Assent received on June 28, 2024, the amendments to Division 321 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) have finally brought about legislative certainty for general insurers. These amendments, introduced under the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023, are pivotal as they allow general insurers to continue using audited financial reporting information for their tax returns. 

Division 321 addresses the tax treatment of premium income for general insurance companies, traditionally aligned with AASB 1023 General Insurance Contracts until the mandatory adoption of AASB 17 Insurance Contracts on January 1, 2023. The shift to AASB 17 as the new accounting standard for insurance contracts necessitated adjustments in tax treatment, causing uncertainty in calculating tax liabilities from general insurance contracts. 

The amended law now aligns Division 321 with AASB 17, incorporating legislated adjustments to ensure consistency between accounting practices and tax obligations. Effective for income years commencing on or after January 1, 2023, these amendments include transitional arrangements aimed at facilitating a smooth transition without creating permanent tax differences upon adopting AASB 17. 

The journey towards these amendments began with the issuance of the Exposure Draft Treasury Laws Amendment (Measures for Future Bills) Bill 2023 on July 10, 2023, following public consultation. This initiative was part of broader efforts to streamline compliance for general insurers, responding to feedback from industry stakeholders during the consultation period. 

For additional detail on the measures read our previous article on the proposed amendments.

Division 321 of the ITAA 1997, originally designed around AASB 1023, underwent significant revision due to the introduction of AASB 17 as the new accounting standard for insurance contracts. The amendments now enable general insurers to use audited financial reports as a basis for tax returns, thereby minimising regulatory burdens. 

Key provisions include: 

• Subdivision 321-A: Adjustments in tax treatment related to the ‘liability for incurred claims’ under AASB 17, replacing the concept of ‘outstanding claims liability’.
• Subdivision 321-B: Adjustments for the ‘liability for remaining coverage’ under AASB 17, replacing the concept of ‘unearned premium reserve’.
• Definition Alignment: Incorporating definitions referencing AASB 17 as of January 1, 2023, to ensure consistency regardless of future changes to the accounting standard.

The amendments also address consequential adjustments to income tax consolidation rules, ensuring alignment with AASB 17 principles for general insurance companies joining or leaving tax consolidated groups. 

Implementation and Transitional Arrangements 

These changes apply from income years starting on or after January 1, 2023, with transitional arrangements available. Insurers also have the irrevocable option to spread adjustments over five years, providing flexibility in managing the impact on their financial reporting and tax obligations.

Industry response 

Feedback from public consultation underscored the importance of transitional relief and flexibility for insurers during implementation. Insurers are advised to evaluate the implications of these amendments thoroughly, ensuring compliance with updated requirements to streamline accounting and tax recognition practices. 

Australian Tax Office Guidance 

The Australian Taxation Office (ATO) have also released guidance on the legislation and published a form for general insurers to make an election to spread AASB 17 changes.

Next Steps

The amendments to Division 321 ITAA 1997 mark a significant milestone in achieving consistency between accounting standards and tax treatments for general insurance contracts. By aligning with AASB 17 and introducing transitional measures, the amendments aim to support operational efficiency and reduce compliance burdens across the industry.

General insurers should engage with their Insurance Services advisers to navigate these changes. For further queries, please contact your local insurance services adviser.