Supreme Court rejects Sovereign's application for leave to appeal judgment against the insurer and in favour of IRD in $82 mln tax case

Insurer Sovereign has accepted defeat in a long running tax dispute with the Inland Revenue Department after having an application to the Supreme Court seeking leave to appeal a Court of Appeal judgment rejected.

The case relates to reinsurance contracts entered into in the 1990s, before Sovereign was acquired by ASB's parent Commonwealth Bank of Australia in 1998. Sovereign says $82 million was at stake, although the Supreme Court's judgment points to "around $90 million," including core tax of $47.5 million plus use of money charges.

The judgment says the question raised by the case was one of application rather than principle and there is no appearance of a miscarriage of justice.

"Accordingly the application for leave to appeal is dismissed."

The arrangements at issue took effect from April 1992 featuring the reinsurance of mortality risk, and refundable commissions paid to Sovereign by reinsurers.

"Sovereign treated the commissions as taxable income when received and the commission repayments as deductible when made. The (Inland Revenue) Commissioner’s approach under the accruals regime was to treat the commission repayments as deductible only to the extent that they exceeded the commissions received by Sovereign and to spread the deductibility over the terms of the commission arrangements. So in issue is a question of timing which in normal circumstances would have no practical ramifications. In this case, however, Sovereign was taken over by ASB Bank in December 1998 and it cannot carry forward tax losses incurred before then," the judgment says.

"On the basis of the reversal of its tax treatment of the refundable commission arrangements, Sovereign has incurred losses before 2000 which it cannot use to shelter the increased income resulting from the Commissioner’s refusal to allow deductions for repayments made from 2000. The core tax involved is around $47.5m and, with use of money charges, the total amount at stake is around $90m."

For its part Sovereign says the judgment brings an end to the proceedings.

"The issue is a long-running one involving the technical application of the income tax rules to reinsurance contracts. There is no allegation of tax avoidance. Sovereign has consistently disclosed the issue in its financial statements since 2004. Full disclosure has also been made to Sovereign’s financial strength rating agency, A.M. Best, and the outcome of the Court of Appeal proceedings will not impact the company’s financial strength rating," Sovereign said.

See an earlier story on the case here.