Life coys sign special deal with IRD

Five major life insurers have got the year off to a good start by reaching a special agreement with the Inland Revenue Department on a common approach to calculating their actuarial reserves and determining how much tax they pay.

The agreement means that the life companies involved have avoided a regime that would have seen them pay significantly more tax than they have been paying. The deal is also a bit of a milestone as it is relatively unusual for the IRD to form special agreements with industry groups.

At the heart of the matter is how much tax life companies paid on their reserves. There has been a high degree of uncertainty in this area and each company has taken a different approach to the issue.

IRD started looking at the matter in 1999 and has done audits or investigations on a number of life companies.

In December 2001 it produced a discussion document which proved to be highly contentious.

Investment Savings and Insurance Association chief executive Vance Arkinstall says if the department had implemented the plans it suggested in the document then the industry would have taken IRD to court.

"Had the IRD continued with that line of argument we would have certainly taken them to court," Arkinstall says.

"We felt we had a very, very strong legal case."

He also says that under that proposal life companies would have had to pay significantly more tax than they have done.

However, IRD and the major insurers have reached a compromise that protects the position in the past and provides certainty going forward.

IRD plans to take the document to other insurers and expects that they will sign up to it.

IRD's manager banking and insurance sectors for the corporate segment, Patrick Goggan, says if they don't sign up to it they could end up being treated under the proposals presented in the discussion document.

He describes the document as the department's "backstop position", and believes there are some beneficial things for insurers in this new agreement.

Neither IRD nor ISI would name the firms that have signed up to the agreement.

Likewise, neither could accurately say what impact the new agreement will have in terms of the overall quantum of tax insurers will pay.

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