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Income Tax Act 2007

Timing and quantifying rules - Life insurance rules - Shareholder base other profit: profit participation policies

EY 28: Shareholder base other profit: profit participation policies that are existing business

You could also call this:

“Calculating profit for certain older life insurance policies”

This section explains how a life insurer calculates profit for certain types of insurance policies called profit participation policies that are considered “existing business”. Here’s what you need to know:

The life insurer uses a special formula to work out the profit amount. This formula takes into account things like premiums, claims, and policy liabilities.

If the formula gives a positive number, that amount is added to the life insurer’s income. If it’s negative, it’s subtracted as a deduction.

The calculation looks at the difference between what actually happened in a year (like how much was paid in premiums and claims) and what the insurer expected to happen.

“Existing business” means policies that were:

  • Issued on or before 30 June 2009
  • Issued after that date but on very similar terms to earlier policies
  • Issued to replace policies that were considered existing business

The law also explains how to figure out policy liabilities and what assumptions to use when making calculations.

If you want to know more about a specific part of this calculation, you can ask for more details.

This text is automatically generated. It might be out of date or be missing some parts. Find out more about how we do this.

View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515863.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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EY 27: Capital guarantee reserving amount: non-participation policies not annuities, or

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

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EY 29: Shareholder base other profit: profit participation policies that are new business, or

“Calculating profit for new profit participation policies in life insurance”

Part E Timing and quantifying rules
Life insurance rules: Shareholder base other profit: profit participation policies

EY 28Shareholder base other profit: profit participation policies that are existing business

  1. For an income year, a life insurer has an amount, for profit participation policies that are existing business, that is calculated using the formula—

    other profit × gate ÷ (1 + gate).

    Where:

    • In the formula in subsection (1),—

    • other profit is the amount calculated for the income year under subsection (4):
      1. gate is the proportion of a policyholder's share of profits from the asset base that is used in the formula that calculates a transfer to the benefit of the life insurer's shareholders from the profits of the asset base, as described in paragraph (a)(iii) of the definition of profit participation policy.

        1. If, for an income year, the formula in subsection (1) calculates a positive amount, that amount is included as income in the life insurer’s shareholder base income. If it is a negative amount, then that amount is included as a deduction in the life insurer’s shareholder base allowable deductions.

        2. For the purposes of the item other profit in subsection (2), an amount is calculated, for the income year (the current year) for profit participation policies that are existing business, using the following formula:

          (premiums − premiums estimate) − (claims − claims estimate) − (closing liabilities − estimated closing liabilities).

          Where:

          • In the formula in subsection (4),—

          • premiums is the amount of premiums for policies for the current year, but subtracting relevant life reinsurance premiums:
            1. premiums estimate is the actuarially determined total amount of premiums that the life insurer expected, using best estimate assumptions, to receive in the current year for policies that were in force at the start of the current year or are first entered into in the current year, after subtracting the value, net of tax and used in the life insurer’s financial accounts, of relevant life reinsurance premiums for the current year:
              1. claims is the amount of claims for the current year, after subtracting relevant life reinsurance claims:
                1. claims estimate is the actuarially determined total amount of claims that the life insurer expected, using best estimate assumptions, to receive in the current year for policies that were in force at the start of the current year or are first entered into in the current year, after subtracting the value, net of tax and used in the life insurer’s financial accounts, of relevant life reinsurance claims for the current year:
                  1. closing liabilities is the total amount, determined as at the end of the current year for policies that are in force at the end of the current year, of the policy liabilities including benefits that vest by the end of the current year:
                    1. estimated closing liabilities is the total amount, estimated as at the beginning of the current year for policies that are in force at the start of the current year and expected to be in force at the end of the current year, of the policy liabilities including benefits that vest by the end of the current year.

                      1. For the purposes of subsection (5), the policy liability for a policy is an amount that is actuarially determined for the policy using best estimate assumptions and that—

                      2. is the total amount of future claims, future expenditure or loss, and future tax payments, reduced by the amount of future premiums; and
                        1. is obtained using present values that are net of tax and used in the life insurer’s financial accounts and allowing for life reinsurance premiums and life reinsurance claims; and
                          1. does not include bonus declarations that vest after the current year.

                            1. The same best estimate assumptions must be used for actuarially determining amounts under subsections (5) and (6). The assumptions may be appropriate for the start of the year, or for the end of the year, but once the choice is made between start of the year and end of the year, that basis may not be changed.

                            2. For the purposes of this section and section EY 29, existing business means, for a policy, that it is—

                            3. issued on or before 30 June 2009:
                              1. issued after 30 June 2009, if—
                                1. issued on the same substantial and material terms, conditions, and bonus entitlements as profit participation policies that the life insurer issued on or before 30 June 2009, ignoring any annual increase in life insurance cover that is less than 10% or less than annual percentage change in the Consumers Price Index (all groups):
                                  1. issued as the result of conversion rights in a policy issued on or before 30 June 2009:
                                  2. the replacement of another policy (the replaced policy) caused by a life insurer being sold, or selling or transferring its rights and obligations under the replaced policy, and—
                                    1. the replaced policy was existing business under this subsection; and
                                      1. the replaced policy and the policy have the same substantial and material terms, conditions, and bonus entitlements ignoring any annual increase in life insurance cover that is less than 10% or is less than the annual percentage change in the Consumers Price Index (all groups).

                                      2. In this section, Consumers Price Index (all groups) means the Consumers Price Index (all groups) published by Statistics New Zealand or, if that index ceases to be published, any measure certified by the Government Statistician as being equivalent to that index.

                                      Notes
                                      • Section EY 28: substituted, on , by section 190(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                      • Section EY 28(4) formula: amended, on (applying for income years beginning on or after this date), by section 89(1)(a) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                      • Section EY 28(4) formula: amended, on (applying for income years beginning on or after this date), by section 89(1)(b) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                      • Section EY 28(5)(b): amended, on , by section 89(2) (and see section 89(9) and (10)) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                      • Section EY 28(5)(d): amended, on , by section 89(3) (and see section 89(9) and (10)) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                      • Section EY 28(5)(e): replaced, on (applying for income years beginning on or after this date), by section 89(4) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                      • Section EY 28(5)(f): replaced, on (applying for income years beginning on or after this date), by section 89(5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                      • Section EY 28(6) heading: replaced, on (applying for income years beginning on or after this date), by section 89(6) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                      • Section EY 28(6): replaced, on (applying for income years beginning on or after this date), by section 89(6) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                      • Section EY 28(7): amended, on (applying for income years beginning on or after this date), by section 89(7) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                      • Section EY 28(8) existing business paragraph (a): amended (with effect on 1 July 2010), on , by section 54(1)(a) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                      • Section EY 28(8) existing business paragraph (b)(i): amended, on , by section 107(1) of the Data and Statistics Act 2022 (2022 No 39).
                                      • Section EY 28(8) existing business paragraph (b)(ii): amended (with effect on 1 July 2010), on , by section 54(1)(b) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                      • Section EY 28(8) existing business paragraph (c): inserted (with effect on 1 July 2010), on , by section 54(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                      • Section EY 28(8) existing business paragraph (c)(ii): amended, on , by section 107(1) of the Data and Statistics Act 2022 (2022 No 39).
                                      • Section EY 28(9): inserted, on , by section 107(1) of the Data and Statistics Act 2022 (2022 No 39).
                                      • Section EY 28 list of defined terms present value (net): repealed, on , by section 89(8) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).