HOUSE OF REPRESENTATIVES

Taxation Laws Amendment Bill (No. 2) 2002

EXPLANATORY MEMORANDUM

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Friendly societies

Outline of chapter

2.1 Schedule 2 to this bill amends the ITAA 1997 to defer the commencement date of the Review of Business Taxation proposals to tax friendly societies on investment income received that is attributable to funeral policies, scholarship plans and income bonds sold after 30 November 1999. Friendly societies will remain exempt from tax on that investment income until 30 June 2002.

2.2 The amendments also defer the commencement of the new methodology for working out the capital component of ordinary life insurance investment policies until 1 July 2002.

Context of amendments

2.3 Under paragraph 320-35(1)(f) of the ITAA 1997, friendly societies are exempt from tax on:

·
all investment income received that is attributable to funeral policies, scholarship plans and income bonds issued before 1 December 1999; and
·
investment income received before 1 July 2001 that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999. Friendly societies will be taxed on this income from 1 July 2001 in the same way that life insurance companies are taxed on investment income that is attributable to life insurance investment policies.

2.4 The changes to the tax treatment of investment income received by friendly societies that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999 is integrally linked to the Review of Business Taxation life insurance policyholder reforms. Those reforms have been deferred to allow further consultation with industry.

2.5 Section 320-75 allows a deduction to life insurance companies for the capital component of premiums paid in respect of ordinary life insurance investment policies. The methodology for working out the deduction depends on whether the policy is issued before or after 1 July 2001:

·
if the policy issued before 1 July 2001, the amount allowed as a deduction is the net premiums less the amount that an actuary determines to be attributable to fees and charges; or
·
if the policy issued on or after 1 July 2001, the amount allowed as a deduction is the lesser of:

-
the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
-
the net premiums less the amount that an actuary determines to be attributable to fees and charges.

2.6 Currently, the capital component of premiums is not required to be specified in life insurance policies. However, it was expected that this situation would have changed from 1 July 2001 as life insurance companies developed new policies in response to the Review of Business Taxation life insurance policyholder reforms. As those reforms have been deferred, the change in the methodology (see paragraph 2.5) for working out the deduction for the capital component of premiums paid in respect of ordinary life insurance investment policies will also be deferred until 1 July 2002.

Summary of new law

2.7 Schedule 2 to this bill will amend the ITAA 1997 so that:

·
investment income that friendly societies receive that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999 continues to be exempt from tax until 1 July 2002; and
·
the change in methodology for working out the deduction allowed to life insurance companies for the capital component of premiums paid in respect of ordinary investment life insurance policies is deferred until 1 July 2002.

Comparison of key features of new law and current law
New law Current law
Friendly societies will be exempt from tax on income received that is attributable to all funeral policy, scholarship plan and income bond business until 30 June 2002.

Friendly societies will be taxed on income received after 30 June 2002 that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999.

Friendly societies will be taxed on income received after 30 June 2001 that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999.
The deduction allowed to life insurance companies for the capital component of premiums paid in respect of ordinary life insurance investment policies is worked out as follows:

·
if the policy issued before 1 July 2002, the amount allowed as a deduction will be the net premiums less the amount that an actuary determines to be attributable to fees and charges; or
·
if the policy issued on or after 1 July 2002, the amount allowed as a deduction will be the lesser of:

-
the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
-
net premiums less the amount that an actuary determines to be attributable to fees and charges.

The deduction allowed to life insurance companies for the capital component of premiums paid in respect of ordinary life insurance investment policies is worked out as follows:

·
if the policy issued before 1 July 2001, the amount allowed as a deduction is the net premiums less the amount that an actuary determines to be attributable to fees and charges; or
·
if the policy issued on or after 1 July 2001, the amount allowed as a deduction is the lesser of:

-
the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
-
net premiums less the amount that an actuary determines to be attributable to fees and charges.

Detailed explanation of new law

Exempt income of friendly societies

2.8 Paragraph 320-35(1)(f) will be amended so that it exempts a life insurance company that is a friendly society from tax on:

·
amounts received on or after 1 July 2001 but before 1 July 2002 that are attributable to income bonds, funeral policies or scholarship plans irrespective of the date of issue; and
·
amounts received on or after 1 July 2002 that are attributable to income bonds, funeral policies or scholarship plans issued before 1 December 1999.

[Schedule 2, item 1, subparagraphs 320-35(1)(f)(ia) and (ii)]

2.9 Amounts received before 1 July 2001 that are exempt from income tax under section 50-1 will continue to be exempt from tax under subparagraph 320-35(1)(f)(i).

Deductibility of interest credited to income bonds

2.10 Section 320-110 allows a deduction to a life insurance company that is a friendly society for interest credited to the holders of income bonds issued after 30 November 1999 where the interest accrues on or after 1 July 2001. As a consequence of friendly societies continuing to be exempt from tax until 1 July 2002 on amounts that are attributable to income bonds issued after 30 November 1999, the deduction for interest credited by friendly societies to the holders of income bonds issued after 30 November 1999 will only apply where the interest accrues on or after 1 July 2002. [Schedule 2, item 4, section 320-110]

Capital component of premiums in respect of ordinary life insurance investment policies

2.11 Section 320-75 allows a deduction for the capital component of premiums in respect of ordinary life insurance investment policies. The basis for working out the amount of the deduction will depend on whether the policy was taken out before or after 1 July 2002.

2.12 If the policy issues before 1 July 2002, the amount allowed as a deduction will be the net premiums less the amount that an actuary (having regard to the change over the income year in the sum of the net current termination values of the policies and the movements in those values during the year) determines to be attributable to fees and charges. [Schedule 2, item 3, subsection 320-75(3)]

2.13 If the policy issues on or after 1 July 2002, the amount allowed as a deduction will be the lesser of:

·
the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
·
net premiums less the amount that an actuary (having regard to the change over the income year in the sum of the net current termination values of the policies and the movements in those values during the year) determines to be attributable to fees and charges.

[Schedule 2, item 2, subsection 320-75(2)]

Application and transitional provisions

2.14 The amendments apply from 1 July 2001.


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