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Sovereign faces big bill

Sovereign is liable for $82 million after losing its battle with the Inland Revenue.

Monday, February 3rd 2014, 6:00AM

by Susan Edmunds

It was appealing a 2012 High Court ruling in which it was found that it had not given the right tax treatment to reinsurance arrangements with three reinsurers between 2000 and 2006.

Sovereign said it was reviewing the Court of Appeal ruling that upheld the High Court finding and was considering whether to seek leave to appeal.

Chief executive Symon Brewis-Weston said the decision would not affect the company’s A+ financial strength rating.

At issue is the tax treatment of commission flows in which the reinsurers paid refundable commissions on life insurance policies issued. Sovereign would then repay the commissions plus interest over a number of years.
Sovereign treated the commission as income when it was received and as expenses when they were repaid plus interest.

The High Court ruling said that they should have been deatl with under the accrual rules of the Income Tax Act, and only the interest cost on the principal should have been tax deductible.

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