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Practice note number | CPN 017 |
Tax/benefit | Duties |
Type | Insurance |
Date issued | May 2020 |
Issued by | Cullen Smythe Commissioner of State Revenue |
Effective from | 23 March 2020 |
Effective to | |
Status | Current |
This practice note provides guidance for insurers dealing with issues arising from the novel coronavirus (COVID-19) pandemic.
This practice note will remain in force until the end of the 2020/2021 financial year. An extension will then be considered in consultation with the insurance industry.
Due to the novel coronavirus (COVID-19) pandemic, some insurance policy holders will be experiencing unemployment or financial hardship.
A number of insurers are seeking to offer these policy holders the opportunity to ‘pause’ their premium payment obligations or reduce their level of cover.
Depending on the circumstances of the policy holders we are informed that the ‘pause’ period could be for 3, 6 or even 12 months.
During the ‘pause’ period either reduced premiums or no premiums may be payable, and cover may or may not be in place during the paused period. Before or at the end of the ‘pause’ period, cover may be reinstated with no or limited underwriting or may be reduced with a premium reduction due to hardship.
In the ordinary course, relevant ‘paused’ policies would simply be re-started after the pause.
However, due to the complexities of some life companies’ product administration systems, it may be necessary to cancel the existing policy during the period of ‘pause’ and re-issue the policy (with exactly the same terms apart from a possible reduction) after the ‘pause’, or record ‘false’ premium payments, as if premiums had continued to be paid during the ‘pause’.
Under the Duties Act 1997 (‘Act’), the ‘re-issue’ of the life insurance policy after the pause, will generally attract duty as a new policy, being
Where the issuing of a new policy following a ‘pause’ is due to the requirements of a life companies administration system the following rules will apply:
Where a policy is cancelled during the first year the following rules will apply:
any refunds or true-ups calculated at that time can be offset against the duty payable in a return period up to and including the June 2021 return.
If a life company has paid duty on the expectation that a premium or an instalment of a premium was to be received and due to a ‘pause’ the premium or instalment of a premium was not received, the life company is authorised to offset this amount against any other payment required to be made under this Act by the life company in a return period up to and including the June 2021 return.
Should the premium or instalment of the premium subsequently be received, then the appropriate duty should be paid in the next return period.
Refunds are available and can be offset against the duty payable in a return period up to and including the June 2021 return.
Section 238 of the Act provides that a general insurer is entitled to a refund of duty if the general insurer refunds, or there is refunded to the person, the whole or a part of a dutiable premium in respect of the contract of insurance for which duty has been paid.
The refund is the duty paid on the amount of the premium refunded. A general insurer to whom duty is refunded may apply the amount of the refund to offset any other payment required to be made under this Act by the general insurer.
Where a general insurer has paid duty on the expectation that a premium or an instalment of a premium was to be received and due to a ‘pause’ the premium or instalment of a premium was not received, the general insurer is authorised to offset this amount against any other payment required to be made under this Act by the general insurer.
Should the premium or instalment of the premium subsequently be received, then the appropriate duty should be paid in the next return period.
An insurer will be required to keep sufficient records to substantiate any refund or offset due to a policy being paused. As a minimum, the following records should be kept.
Section 254 of the Act provides that a registered insurer may require a person by whom a premium is payable to the insurer to pay the insurer an amount equal to the duty chargeable.
Under section 20 of the Taxation Administration Act 1996 the Chief Commissioner may refuse to make a refund to a taxpayer if:
(a) the relevant taxation law provides for the passing on of the tax to another person; and
(b) the tax sought to be refunded has been passed on to another person; and
(c) the Chief Commissioner is not satisfied that appropriate arrangements have been made
to pass the tax sought to be refunded on to that other person.
Where a registered insurer has passed on the duty to a policyholder and subsequently claims a refund or offset, it is expected that the duty will be refunded to the policyholder.
For all other issues arising due to COVID-19 and not covered by this practice note, please apply for a special tax arrangement here.