General insurance claims reserves and events that occurred before July 1993

Clauses 2(3) and (4), 8, 25, 101 and 104

Issue: Support for proposed amendment

Submission

(New Zealand Institute of Chartered Accountants)

The technical amendment is logical.

Comment

Before July 1993, general insurance business carried on outside New Zealand was not subject to New Zealand income tax. As a result, New Zealand insurers were unable to claim deductions in relation to claims that were connected with this offshore business. From 1 July 1993 insurance business carried on outside New Zealand by New Zealand residents became taxable. Specific transitional rules were included in the Income Tax Act 1976 to deal with the change.

Transitional rules deny insurers a deduction for any pre-1993 claims under section DZ 10.

The rules for calculating the outstanding claims reserve under the Income Tax Act 2007 do not explicitly exclude amounts relating to pre-1993 events and arguably tracks claims when an entitlement to a tax deduction for the claim does not exist under section DZ 10. This outcome was not envisaged and appears to impose an unnecessary requirement on taxpayers to track insurance events when under the transitional rules no deduction would be allowed for a claim that is connected with a pre-July 1993 event.

The proposed amendment explicitly excludes from the calculation of a general insurer’s outstanding claims reserve – sections CR 4 and DW 4 – certain insurance events that occurred before 1 July 1993.

Recommendation

That the submission be noted.