The transactions must not be entered into to avoid tax 109 If the true

The transactions must not be entered into to avoid

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The transactions must not be entered into to avoid tax. 10.9 If the “true reinsurance” definition is not met, the contract may be treated as financial reinsurance. In such cases the premiums will be treated as a deposit and non-deductible to the life insurer, and the investment income accruing in respect of the amount deposited will be brought to tax by the life insurer. The accrual rules may need to be amended accordingly or some other method used to determine the income. A New Zealand-resident reinsurer (or one that is subject to New Zealand tax on its reinsurance income) would not include the premiums in income and would be allowed a deduction for the accrued interest. 10.10 Submissions on practical ways of taxing the income are invited. The government is also interested in any other issues related to reinsurance that may require legislative clarification. 10.11 If a life insurer fully reinsures its business, the company will not be subject to the life insurance rules, as is the case under the current rules. International Financial Reporting Standards (IFRS) 11 There are two basic types of reinsurance. Under a reinsurance treaty, the reinsurer contracts to accept a specified amount of all risks or losses defined in the treaty. The reinsurer does not have the right to examine and select from those risks that meet the defined risks under the contract. With a facultative reinsurance contract , the reinsurer assesses each policy before agreeing to assume risks. This type of reinsurance is usually limited to large insurance policies. Under either type of contract, the reinsurer and insurer will share risks on an agreed basis. Under proportional reinsurance arrangements , a constant proportion of each risk is shared. Non-proportional reinsurance arrangements , on the other hand, can be used to limit the maximum risk faced by an insurer. 41
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10.12 Financial accounting for life insurance is governed by IFRS 4. However, owing to the complexity of the accounting issues, the International Accounting Standards Board (IASB) issued Discussion Paper: Preliminary Views on Insurance Contracts, on 3 May 2007. This document sets out preliminary views on the measurement and recognition of insurance contracts and financial instruments with discretionary participating features. 10.13 The proposed tax rules discussed in this document are based on the current standard. It is not certain when and to what extent the IASB proposals will become part of an amended IFRS 4, though it should be noted that in that event, every country will have to address its life tax legislation in the light of any changes. 42
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APPENDIX 1 Comparison of selected countries: income taxation treatment of life insurers Country Underwriting profits Investment income and realised capital gains Allocation of income between shareholders and policyholders Premium or other life insurance-specific taxes Australia Risk premiums taxable and risk claims deductible.
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