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Income Tax Act 2007

Timing and quantifying rules - Life insurance rules - Non-participation policies: reserves

EY 27: Capital guarantee reserving amount: non-participation policies not annuities

You could also call this:

“How to calculate and use the reserving amount for certain non-annuity insurance policies”

You, as a life insurer, need to know about something called a reserving amount for certain types of insurance policies. This reserving amount is calculated using a special formula. The formula subtracts the closing capital guarantee reserve from the opening capital guarantee reserve.

The opening capital guarantee reserve is usually the amount you had at the end of the previous year. But if you didn’t have one last year, you need to calculate what it would have been.

The closing capital guarantee reserve is the amount you have at the end of this year. It’s based on the money you set aside to make sure you can keep your promises about returning people’s investments or paying them a minimum return.

If the reserving amount you calculate is a positive number, you can deduct it from your taxes. If it’s a negative number, you need to count it as income.

However, you don’t have to count it as income if it’s money you’re using to replace lost capital in your policyholder base.

This law applies to policies that aren’t annuities and don’t have participation features.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515860.

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Money and consumer rights > Taxes
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“Calculating reserve for future insurance premiums on non-annuity policies”

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Part E Timing and quantifying rules
Life insurance rules: Non-participation policies: reserves

EY 27Capital guarantee reserving amount: non-participation policies not annuities

  1. For an income year (the current year), a life insurer has a reserving amount for a class of policies calculated using the formula—

    opening capital guarantee reserve − closing capital guarantee reserve.

    Where:

    • In the formula,—

    • opening capital guarantee reserve is—
      1. the amount of the life insurer’s closing capital guarantee reserve for the class of policies, for the income year before the current year; or
        1. the amount that would be the capital guarantee reserve for the class of policies, using subsection (3) with necessary modifications, calculated at the end of the income year before the current year, if the life insurer has no closing capital guarantee reserve for the income year before the current year:
        2. closing capital guarantee reserve is the amount of the life insurer’s capital guarantee reserve under subsection (3) for the class of policies, calculated at the end of the current year.

          1. A life insurer’s capital guarantee reserve is the net amount of credits and debits on account of a risk-linked provision for future obligations in relation to a guarantee, for the class of policies, by the life insurer that capital invested will be returned or that a minimum return on capital will be paid.

          2. For the current year, if the reserving amount under this section is positive, the life insurer has that amount as a deduction included in their policyholder base allowable deductions. For the current year, if the reserving amount under this section is negative, the life insurer has that amount as income included in their policyholder base income.

          3. Despite subsection (4), for the current year, the life insurer does not have that amount as income included in their policyholder base income to the extent to which the amount represents payment on account of lost capital in the policyholder base.

          Notes
          • Section EY 27: substituted, on , by section 190(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
          • Section EY 27(2)(a)(ii): amended (with effect on 1 July 2010), on , by section 49(1) of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).