Revised Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 8 - Imputation - conversion of franking account balances
Outline of Chapter
8.1 This Chapter explains amendments that, broadly speaking, ensure the dividend imputation system in the ITAA 1936 properly takes account of the new 34% company tax rate. The amendments are contained in items 85 to 97 of Schedule 3 to this Bill.
8.2 Some of the provisions being amended in this Bill were recently introduced to convert, on 1 July 2000, those parts of the imputation system reflecting a 36% rate to instead reflect the 34% rate.
8.3 The amendments arise from:
- the life insurance company measures to be introduced in this Bill, the broad effect of which will be that the 39% tax rate, currently applying to some parts of taxable income, will be reduced to the company tax rate;
- the possibility of franking credits and debits arising before the conversion date of 1 July 2000 that reflect a 34% rate, particularly in relation to the payment of PAYG instalments by early balancing companies; and
- changes to the way estimated debit determinations are treated for the purposes of converting the imputation system to reflect the 34% rate.
Context of Reform
8.4 The reductions in the company tax rate, provided for in the Income Tax Rates Act No. 1, are a key component of the New Business Tax System announced in Treasurer's Press Release No. 58 of 21 September 1999 (refer to Attachment A).
8.5 The reduced company tax rate will provide Australia with an internationally competitive company tax rate. The eventual reduction of the company tax rate to 30% will bring the Australian rate into line with rates in other countries in the Asia Pacific region and will boost investment in Australia.
8.6 As a result of the reduction in the company tax rate for the 2000-2001 income year, amendments to the dividend imputation system were introduced in the NBTS Miscellaneous Bill 1999. That Bill amends the imputation system to:
- convert class C franking account balances from 1 July 2000, from being based on a tax rate of 36%, to instead reflect the new company tax rate of 34%;
- convert most franking credits and franking debits arising on or after 1 July 2000 that reflect a tax rate other than 34% to instead reflect the new company tax rate of 34%; and
- provide that most franked dividends paid on or after 1 July 2000 carry imputation credits reflecting a 34% rate.
8.7 The 2 key tax reform measures giving rise to most of the amendments explained in this Chapter are:
- the measures broadening the tax base for life insurance companies from 1 July 2000; and
- the application of the PAYG system from the 2000-2001 income year for tax instalments payable by companies.
Summary of new law
Life insurance company measures
8.8 The new law will convert class A franking surpluses and deficits of life insurance companies to corresponding class C franking credits and debits on 1 July 2000. This will effectively close-off class A franking accounts for life insurance companies.
8.9 The balance of class A franking accounts represent tax paid at a 39% rate. Closing-off these accounts for life insurance companies recognises that these companies will, from 1 July 2000, no longer pay tax at a 39% rate.
8.10 Class A franking credits and debits of life insurance companies arising on or after 1 July 2000 will generally be converted to equivalent class C franking credits and debits reflecting a 34% rate.
34% credits and debits arising before 1 July 2000
8.11 The new law will also convert class C franking credits or franking debits arising before 1 July 2000 that reflect a company tax rate of 34% into equivalent class C franking credits or debits reflecting a 36% rate. This change is necessary because class C franking account balances will reflect a company tax rate of 36% before 1 July 2000, and will only reflect a 34% rate after that date.
Amendments related to estimated debit determinations
8.12 Finally, the new law will amend the conversion of franking account provisions to simplify, and correct potential anomalies in the treatment of franking credits and debits arising from estimated debit determinations.