In June 2014, a longstanding tax case, Sovereign Assurance Company Ltd and others v Commissioner of Inland Revenue (Sovereign Assurance), was finalised in the New Zealand courts by the Supreme Court of New Zealand refusing to grant the taxpayer leave to appeal. 

Sovereign Assurance considered the application of New Zealand’s taxation of financial arrangements rules to reinsurance treaties entered into by a New Zealand insurer. New Zealand’s financial arrangements rules are in Part EW of the Income Tax Act 2007 (NZ) (ITA), and were enacted in the late 1980s. Much of the detail of New Zealand’s rules is replicated in Australia’s taxation of financial arrangements (TOFA) regime in Div 230 of the Income Tax Assessment Act 1997 (Cth) (ITAA97). There are differences of course, particularly in the complexity of the two sets of rules. 

In this article, originally published in Taxation in Australia (April 2015) Tax partner Joanne Dunne and senior associate James Hamblin provide some context to New Zealand’s financial arrangements rules, and outline the facts and main holdings in Sovereign Assurance. The controversial aspects of the decision in New Zealand are identified. New Zealand’s financial arrangements rules are also compared to the Australian TOFA rules and it is considered whether the result could have been different if it had been decided in Australia.

Download a PDF of the full article Australian TOFA implications for insurers from the NZ Sovereign Assurance case