Record keeping requirements for foreign general insurers carrying on business in Australia through a permanent establishment Legislative Instrument
Explanatory Statement
General outline of instrument:
This Instrument deals with the record keeping requirements for general insurers carrying on business in Australia through a permanent establishment.
This Instrument is a legislative instrument for the purposes of the Legislative Instruments Act 2003. It is made by, and is legally binding upon, the Commissioner of Taxation (the Commissioner).
Date of effect
This Instrument commences on 1 July 2002. The reason for this retrospective application is that the Commissioner has sought to prevent the imposition of an additional cost burden on foreign general insurers affected by the introduction of section 820-960 of the Income Tax Assessment Act 1997 (ITAA 1997).
What is this instrument about:
This instrument sets out the Commissioner’s decision exempting foreign general insurers from complying with Australian Accounting Standards under subsection 820-960(4) of ITAA 1997.
What is the effect of this instrument:
The effect of this instrument is that any foreign general insurer authorised to operate in Australia by the Australian Prudential Regulation Authority (APRA) under the Insurance Act 1973 as defined under section 3 of the said Act will be exempted from the requirement to use Australian accounting standards in preparing its financial statements if it chooses to avail itself of this concession. The exemption applies to foreign general insurers choosing to avail themselves of this concession in relation to the income year commencing on or after 1 July 2002.
The Commissioner’s decision is based on the fact that if the provisions of section 820-960 were to be applied strictly, the relevant entities would have been required to incur significant costs in order to:
- separately record/measure transactions with Australian accounting standards specifically in mind;
- conduct specific period-end actuarial valuations;
- maintain internal accounting personnel with additional technical expertise relating to accounting standards, or incur significant external consultants’ costs to access relevant expertise;
- prepare and review periodic financial reports that accord with Australian accounting standards.
Moreover, the Commissioner’s decision has a retrospective effect given that it applies to foreign general insurers in relation to the income year commencing on or after 1 July 2002.
The Commissioner has exercised his discretion in such a way that the full effect of these provisions has no application to those entities, if they so choose, as from the date at which they would have been required by law to apply the new provision.
The objective of this legislative instrument is to decrease the costs of compliance of foreign general insurers operating in Australia through a permanent establishment. To require these entities to conform with the requirements of section 820-960 for a period starting from 1 July 2002 up to the date where this legislative instrument is registered defeats the initial intent of reducing compliance costs.
Indeed, had the Commissioner not aligned his decision with the date when section 820-960 of ITAA 1997 were to have full effect, those general insurers would have had to modify their accounting systems in order to comply with the law as from 1July 2002 until such date as the Commissioner’s decision would have taken effect and then, at that date, revert to their original systems.
In accordance with subsection 12(2) of the Legislative Instruments Act 2003 this retrospective operation does not adversely affect the rights or liabilities of any person other than the Commonwealth.
Background:
Section 820-960 of the ITAA 1997 states that if, during all or part of an income year, an entity is:
- an inward investor (general)[1];
- an inward investor (financial)[2]; or
- an inward investing entity (ADI)[3];
and carries on business in Australia through one or more Australian PEs[4] throughout that year, and has total revenues attributable to those PEs for that year of at least $2 million, then that entity must keep certain records about the affairs of those PEs.
An entity is required to keep:
- a statement of financial position; and
- a statement of financial performance.
These records are required to be prepared in accordance with—
- the relevant Australian accounting standards (subsection 820-960(1A))[5], or
- those corresponding standards from the UK, the USA, Canada, New Zealand, Japan, the French Republic, or the Federal Republic of Germany (subsection 820-960(1C), or
- the international accounting standards made or adopted by the International Accounting Standards Board (subsection 820-960(1D)).
However, subsection 820-960(4) grants power to the Commissioner to exempt an entity or a class of entities from complying with the requirement to use Australian accounting standards for one or more income years if he is satisfied that it would be unreasonable that the entity, or the entities in that class, be required to do so. The Commissioner’s decision needs to be made in writing with a copy of the decision published in the Gazette (subsection 820-960(5)).
In December 2003, Parliament enacted the Legislative Instruments Act 2003 (the Act). The Act came into force on 1 January 2005. The Act defines a legislative instrument as an instrument in writing that determines the law or alters the content of the law rather than applying the law in a particular case.[6] In short, a legislative instrument is an instrument that refers to an exercise of power (by an administrative body) which has a legislative character (subsection 5(4) of the Act).
Since the exercise of the discretion is an instance of the ATO creating a legislative instrument, it then follows that if the Commissioner were to be asked to exercise his discretion and if he were to agree to do so, he is required under the Act to ensure that he has acted within the provisions of the Act.
By letter dated 5 July 2004 the Insurance Council of Australia (‘ICA’) formally requested that the Commissioner exercise his discretion under subsection 820-960(4) ‘in favour of general insurers operating in Australia through a permanent establishment.’ While the ICA noted that ‘the Commissioner’s power to exempt has no associated requirement for an alternative report to exist…all Australian general insurers are regulated by APRA and are required to maintain records and to file periodic returns to APRA.’ The ICA went on to suggest that although these disclosures were not drawn pursuant to the Australian accounting standards, they are in fact ‘comprehensive and include a statement of financial position and a statement of financial performance.’
APRA authorised insurers are required to lodge quarterly and annual returns in accordance with APRA standards. In particular, the ICA refers to APRA Forms GRF 300.0, Statement of Financial Position, and Form GRF 310.0, Statement of Financial Performance mentioned above. The bulk of information contained in those returns is in accordance with Australian accounting standards. APRA standards differ from AASB 1023 in the valuation of liabilities. APRA’s methodology is set out in its General Insurance Standard GP 210 and Guidance Note GGN 210.1. Where APRA standards differ from accounting standards it is reasonable to expect the APRA values to be fully reconciled to the tax return by the insurer.
After engaging in an extensive consultation process as described further below, the Commissioner is acquiescent to that request and will therefore exercise his discretion under subsection 820-960(4).
In light of the earlier description, clearly, the Commissioner would, by virtue of this exercise, create a legislative instrument. It thus follows that the Commissioner must satisfy himself that the instrument witnessing his decision, being a legislative instrument, abides by the requirements of the Act.
In accordance with subsection 12(2) of the Legislative Instruments Act 2003 this retrospective operation does not adversely affect the rights or liabilities of any person other than the Commonwealth.
Consultation:
The Commissioner is satisfied that adequate consultation has been carried out in relation to this instrument. Such consultation has comprised the following:
- The issues raised by the ICA’s request have been discussed at the ICA/ATO Tax Committee quarterly meeting of 22 November 2004;
- Further discussions were held between representatives of the ATO and the ICA on 8 September 2004;
- The Commissioner has written to each of the 18 general insurers operating in Australia through a PE advising them of his intention to exercise his discretion and allowing a reasonable time for them to object;
- To date, no such objection has been received by the ATO.
Therefore, the Commissioner is of the view that Industry, and more specifically all entities likely to be affected by this decision, have been made fully aware of the exercise of his discretion under subsection 820-960(4) of ITAA 1997. However, the Commissioner considers that if any foreign general insurer were to choose not to avail itself of this concession, then it remains bound by the provisions of subsection 820-960(1A) of the ITAA 1997.
Finally, once the legislative instrument has been registered, it will appear on the ATO’s website www.ato.gov.au.
Commissioner of Taxation
19 June 2006
Previous draft:
none
Related Rulings/Determinations:
The Commissioner has exercised his discretion pursuant to subsection 960-960(4) in relation to foreign banks operating through PEs. The decision was notified in the Commonwealth Gazette No. GN 35, of September 2004
Previous Rulings/Determinations:
none
Subject references:
Commissioner’s discretion
Thin capitalisation
Legislative references:
Income Tax Assessment Act 1997
Legislative Instruments Act 2003
Insurance Act 1973
Case references:
none
Other references:
None
ATO references
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[1] An inward investor (general) is an entity which is a foreign entity throughout a period that is all or a part of an income year, but is not a financial entity, nor an authorised deposit-taking institution (ADI), at any time during that period (subsection 820-185(2)).
[2] An inward investor (financial) is an entity which is both a foreign entity and a financial entity throughout a period that is all or a part of an income year (subsection 820-185(2)).
[3] An inward investing entity (ADI) is a foreign bank that carries on its banking business in Australia at or through one or more of its Australian permanent establishments (subsection 820-395(2)).
[4] The concept of “permanent establishment” as within the meaning of the relevant double tax agreement (subsection 820-960(6)).
[5] Australian accounting standard AASB 1001, AASB 1018 and AASB 1040.
[6] Legislative instruments were previously referred to under various names including: Legislative Determinations, Orders and Notices.