Tax perspective on Federal Budget 2023 - general insurance tax changes (AASB 17)

The Australian Government will amend the current tax law to minimise the regulatory burden on the general insurance industry

This article sets out the background to the proposed changes announced by the Government in its 2023-2024 Federal Budget in aligning the taxation of insurance companies with the new accounting standard, AASB 17.  AASB 17 establishes principles for the recognition, measurement, presentation, and disclosure of insurance contracts. The requirements are designed to help users of financial statements better understand an insurer’s exposure, profitability and financial position, and facilitate comparisons across similar insurance companies.

Background to the proposed changes

In November 2018, the Australian Government published a consultation paper Taxation of Insurance to seek comments from interested parties on the impacts of implementing the new accounting standard AASB 17. The submissions received in relation to this consultation paper raised a number of misalignment issues between the tax law and the new standard for insurers. For general insurers, the tax and accounting misalignment arises because under current tax laws (Division 321 of the Income Tax Assessment Act 1997 (Cth)), they are constructed in a way that imports accounting concepts of AASB 1023 General Insurance Contracts into tax law. When AASB 17 came into effect it removed some of these AASB 1023 concepts.

Some examples of the misalignment between tax and accounting are as follows:

  • AASB 17 has a concept of contractual service margin allocation which represents the unearned profit on the insurance contracts to be recognised in profit or loss over the coverage period. The existing tax law does not have this concept and it is unclear how this the unearned profit should be treated for tax purposes under Division 321
  • AASB 1023 required a distinction between direct and indirect claims settlement costs whereas AASB 17 does not. As such, both amounts are included in the outstanding claims liability under AASB 17 to reflect that they are costs of settling outstanding claims. Under the tax law, indirect settlement costs are specifically excluded and requires a separate adjustment when calculating taxable income (a timing difference)
  • AASB 17 requires earlier identification of onerous or loss- making contracts and is unclear how this should be treated for tax purposes.

More recently, interested parties including the Insurance Council of Australia, Financial Services Council, and insurers have been continuing the discussions on the misalignment issue with the Australian Accounting Standards Board (“AASB”) (through its special Transition Resource Group established as a public forum to discuss issues in relation to the implementation of the new standard), the ATO and Treasury have been party to consultation on this issue.

Budget announcement  

The Government will introduce legislation to amend the tax law under Division 321 to ensure that the tax laws will align to the new accounting standard. This is a welcome announcement for the general insurance industry as it aims at reducing the regulatory burden faced by that industry. By allowing general insurers to use audited financial reporting information as the basis for their tax returns, the government hopes to simplify the tax reporting process and reduce compliance costs for insurers.

What is missing from the Budget announcement?

There are some obvious items missing from the Government’s Budget announcement.

It is not yet clear as to how life insurance companies under Division 320 of the Income Tax Assessment Act 1997 (Cth) have been catered for by any proposed changes. The announcement specifically refers to the general insurance companies and is silent regarding life insurance companies. Noting some health insurance companies also follow Division 321 in calculating their tax position.  

It is also not yet clear whether any transitional measures will be introduced in respect of any tax impacts on transition from the current to the new accounting standard.

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