General insurance outstanding claims reserves and events that occurred before 1 July 1993

Sections CR 4(1B) and DW 4(1B) of the Income Tax Act 2007; sections CR 3(1B) and DW 3(1B) of the Income Tax Act 2004

Changes have been made to clarify the calculation of a general insurer's outstanding claim reserve when it is affected by insurance events that occurred before 1 July 1993.

Background

In 2009, changes were made to the Income Tax Act that aligned the tax treatment of an insurer's outstanding claims reserve (OCR) for general and non-life insurance, with financial reporting and actuarial practice (the 2009 changes). Movements in an insurer's OCR are deductible as the record when an insurer is reasonably expected to be liable for a claim. Following the enactment of these changes, questions were asked about how the OCR rules applied to insurance events that occurred before 1 July 1993, particularly in connection with offshore insurance business carried on by New Zealand-resident taxpayers.

Before 1 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 connection with any claims that were connected with that offshore business. From 1 July 1993, insurance business carried on outside New Zealand by New Zealand residents was deemed taxable. Specific transitional rules were included in the Income Tax Act 1976 to deal with the change.

The transitional rules in section DZ 10 deny insurers a deduction for any pre-1993 claims.

The 2009 changes for calculating the OCR did not specifically exclude amounts relating to pre-1993 claims and arguably tracks claims when an entitlement to a tax deduction does not exist. This outcome was not contemplated and appears to impose an unnecessary requirement on taxpayers to track insurance events for tax purposes when under the transitional rules no deduction would be allowed for a claim that is connected with a pre-July 1993 event.

Key features

New sections CR 4(1B) and DW 4(1B) clarify the interaction between the:

• rules for calculating an insurer's OCR (the 2009 changes); and
• taxation of offshore insurance business carried on by New Zealand-resident insurers before July 1993.

The section provides that claims that are subject to section DZ 10 are excluded from the calculation of an insurer's OCR.

Consequential change to the Income Tax Act 2004

Consequential changes have also been made to the Income Tax Act 2004 (sections CR 3 and DW 3) for insurers who applied the 2009 changes for earlier income years starting from 2006.

Application date

The change applies from 1 April 2008 and earlier income years.