Explanatory Memorandum
(Circulated by authority of the Minister for Financial Services and Regulation, the Honourable J.B. Hockey, MP)Appendix A to Schedule 7 - detailed notes on amendments to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997
A.1 The amendments to the Tax Act primarily relate to establishing a regime for taxing the retirement savings account (RSA) business of friendly societies. Other amendments ensure that existing provisions in the Tax Act and the Income Tax Assessment Act 1997 relating to the taxation of friendly societies, credit unions and cooperative housing societies apply appropriately after the introduction of the Financial Sector Reform amendments.
Friendly societies and other registered organizations
A.2 Items 59 and 105 amend the definition of 'friendly society' in subsection 6(1) of the Tax Act and subsection 995-1(1) of the Income Tax Assessment Act 1997 to ensure that a body that is recognised as a friendly society following the introduction of the financial sector reform amendments is treated as a friendly society for taxation purposes.
A.3 Items 61 and 62 amend the definitions of 'life assurance company' and 'registered organization' to ensure that a friendly society or other registered organisation is not treated as a life insurance company for purposes of the eligible termination payment provisions of the Tax Act.
A.4 Similarly, item 64 amends the definition of 'life assurance company' in section 110 to ensure that a friendly society or other registered organization is not treated as a life insurance company for purposes of Division 8 of the Tax Act.
A.5 Items 65 and 100 - 103 make consequential amendments to ensure that RSAs operated by friendly societies or other registered organizations are taxed under Division 8A of Part III of the Tax Act rather than under Subdivision AB of Division 8 of Part III (RSAs operated by life insurance companies) or Division 7A of Part IX (RSAs operated by other financial institutions).
RSAs operated by friendly societies and other registered organizations
A.6 Division 8A of Part III of the Tax Act outlines the taxation treatment of friendly societies or other registered organizations that carry on life assurance business. Under Division 8A the taxable income of a registered organization is divided into three classes, each of which is taxed at a different rate.
A.7 The three classes of assessable income and appropriate rates are:
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- the eligible insurance business class - which is taxed at a rate of 33%;
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- the complying superannuation/roll-over annuity class - which is taxed at a rate of 15%; and
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- the non-complying superannuation class - which is taxed at a rate of 47%.
A.8 A new class of assessable income will be established for the RSA business of friendly societies or other registered organizations. The RSA class will be split into two components:
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- the RSA category A component taxed at a rate of 15%; and
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- the RSA category B component taxed at a rate of 36%.
A.9 This will ensure that the RSA business of friendly societies or other registered organizations will be taxed consistently with the RSA business of competing entities.
A.10 A number of definitions in subsection 116E(1) will be amended and new definitions inserted in relation to the amendments to Division 8A. Item 66 inserts a heading.
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- 'annuity' - this definition is being amended to ensure that a pension, within the meaning of the Retirement Savings Accounts Act 1997 , paid from an RSA is an annuity for the purposes of Division 8A (item 67).
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- 'eligible insurance policy' - this definition is amended to ensure that an RSA policy is not an eligible insurance policy and is not included in the eligible insurance business class of a registered organization (item 68).
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- 'life assurance policy' - this definition is amended to ensure that, for the purposes of Division 8A, an RSA provided by a registered organization is a life assurance policy (item 69).
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- 'RSA assessable income' - that part of the total income of a registered organization for an income year that is from its RSA business (item 70).
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- 'RSA asset' -an asset of registered organization that relates to the organization's RSA business (item 71).
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- 'RSA business' - the business relating to the issuing of, or the undertaking of liability under, RSAs (item 72).
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- 'RSA category A component' - the component of the RSA combined component worked out under new subsection 116N(2) (item 73).
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- 'RSA category B component' - the component of the RSA combined component worked out under new subsection 116N(3) (item 74).
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- 'RSA combined component' - the component of the taxable income worked out under section 116HE for the RSA class of business (item 75).
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- 'Taxable contribution' - the definition of 'taxable contribution' is relevant for working out the taxable income of an RSA provider under new section 116L and the RSA category A amount of taxable income under new section 116M . The amount of taxable contributions is worked out under Part IX (item 76).
A.1 Section 116G, which exempts a registered organization from tax on all its income other than income from its eligible insurance business, complying superannuation/roll-over annuity business and non-complying superannuation business, will be amended to ensure that income from its RSA business is assessable (item 77).
A.2 Section 116GA provides for the apportionment of gains and losses arising from the disposal of assets of a registered organization between the classes of assessable income based on the class to which the asset relates. Subsection 116GA(3) will be amended to ensure that, consistent with the RSA business of other RSA providers, the ordinary capital gains tax rules will apply to the disposal of assets relating to RSA business (item 78).
A.3 Section 116GB provides for the determination of the net capital gains of a registered organization that is to be included in each class of assessable income. Subsection 116GB(5) will be amended to ensure that prior year capital losses are applied to reduce the overall capital gains for the RSA class of income before reducing the capital gains of the other classes of assessable income (item 79).
A.4 Section 116GD allocates the assessable income of a registered organization between the classes of assessable income. New subsection 116GD(1A) will ensure that the RSA class of assessable income will include (item 80):
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- any assessable income allocated to the RSA class under section 116GA or section 116GB;
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- any amounts included in assessable income under new section 116M(2); and
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- any other RSA assessable income.
A.1 Section 116H, which relates to the allowable deductions of a registered organization, will be amended to ensure that RSA contributions are treated as assessable income for the purposes of the section (item 81).
A.2 Section 116HAB, which allows a deduction for expenditure incurred in obtaining superannuation premiums, will be amended so that it applies consistently to expenditure incurred in obtaining RSA contributions (items 82 - 85).
A.3 Section 116HAC, which allows a deduction for expenditure incurred in obtaining the investment component of relevant life insurance premiums, will be amended so that it does not apply to RSA contributions (item 86).
A.4 Section 116HD, which sets out the order for applying prior year losses against current year assessable income, will be amended so that losses are offset against the RSA class of assessable income before being applied to the other classes of assessable income (item 87). However, new subsection 116O will ensure that losses are not applied to reduce the RSA category A amount of the RSA component of assessable income.
A.5 Item 88 inserts new Subdivision B - RSA providers into Division 8A of Part III to outline the taxation treatment of an RSA provider that is a friendly society or other registered organization. New Subdivision B of Division 8A contains new sections 116K to 116Q .
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- Broadly the amendments identify the taxable income of the RSA provider recognising:
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- specific amounts which are exempt from tax;
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- specific amounts which are included in the RSA combined component of the assessable income of the RSA provider; and
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- specific deductions which are available to an RSA provider.
A.6 The amendments also work out the RSA combined component of taxable income. Once the RSA combined component of the taxable income of a registered organization is established, it is divided into an RSA category A component (which is taxed at a rate of 15%) and a RSA category B component (which is taxed at a rate of 36%)
Assessable income of an RSA provider
A.7 New section 116L provides that the assessable income of an RSA provider includes all taxable contributions made during the year of income to RSAs provided by the RSA provider. Investment income derived by RSA providers is included in the RSA provider's assessable income under the ordinary provisions of the income tax law.
Exempt Income of an RSA provider
A.8 New section 116Q exempts an RSA provider from tax on any amounts that, but for the operation of new subsection 116M(4), would have been taken into account under new paragraph 116M(2)(b) in calculating the RSA category A amount of the RSA combined component of taxable income.
A.9 New subsection 116M(4) excludes interest or any other amounts credited by an RSA provider to an RSA that is paying out a pension from the RSA category A amount of taxable income. The amount that is excluded from the RSA category A amount of taxable income, and which is exempt from tax under new section 116Q , is worked out under new subsections 116M(5) and (6).
A.10 If an RSA is paying out a pension in respect of the whole of the year of income that the RSA was in existence, then the whole amount credited to the RSA category A amount of taxable income will not be taken into account when calculating the assessable income. [ New subsection 116M(5)]
A.11 If an RSA is paying out an annuity for only part of the year of income that the RSA was in existence, then the amount that is not be taken into account when calculating the RSA category A amount of taxable income is calculated using the following formula:
Amount credited to RSA * (Number of days in part of year in respect of which the annuity was paid / Number of days in the year on which the RSA existed)
A.12 In this regard the number of days in the part of the year in respect of which the annuity was paid is the number of days in the period from the first day of the period to which the pension relates until either the end of the year of income or the day on which the RSA ceased to exist, whichever is earlier.
Allowable deductions of an RSA provider
A.13 New section 116P ensures that an RSA provider is not entitled to a deduction for amounts credited to RSAs.
Calculation of the RSA category A amount of taxable income
A.14 New section 116M sets out how to calculate the RSA category A amount of taxable income for a registered organization. The RSA category A amount is the sum of:
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- all taxable contributions made during the year of income to RSAs [ new paragraph 116M(2)(a)] ; and
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- other amounts (other than contributions) credited during the year of income to RSAs reduced by any amounts credited to RSAs that are paying out current pensions [ new paragraph 116M(2)(b) and subsections 116M(4) - (6)] ;
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- less any amounts paid or withdrawn from RSAs other than benefits paid to, or in respect of, the holder of the RSA [ new subsection 116M(2)] .
A.15 In addition, in calculating the RSA category A amount, any tax paid in respect of RSAs is not taken to have been an amount paid from the RSA [ new subsection 116M(30)] .
Components of the RSA combined component
A.16 New subsection 116N provides that the RSA combined component of an RSA provider that is a friendly society or other registered organization is divided into an RSA category A component and an RSA category B component.
A.17 The RSA category A component is the RSA category A amount worked out under new section 116M . That is, the amount actually credited to RSAs.
A.18 The RSA category B component is the RSA combined component reduced by the RSA category A component. That is, the profit made by the friendly society or other registered organization on RSA business.
Restricting losses to the RSA amount of taxable income
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- New section 116O operates to ensure that RSA providers cannot offset losses against RSA income. The new section applies if:
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- the RSA provider has no taxable income;
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- the RSA provider has no RSA combined component; or
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- the RSA combined component is less than the RSA category A amount.
A.1 In these circumstances new subsection 116O(2) applies if the RSA provider has no taxable income or the taxable income of the RSA provider is less than the RSA amount. If new subsection 116O(2) applies:
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- the RSA provider is taken to have both a taxable income and a tax loss for the year of income;
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- the taxable income is equal to the RSA category A component;
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- the tax loss is taken to be the amount that would have been the RSA provider's tax loss if the RSA category A component were not income derived;
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- the RSA combined component and the RSA category A component are equal to the RSA category A amount; and
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- all other components of taxable income are taken to be nil.
A.2 If the circumstances in new subsection 116O(1) apply and the taxable income of the RSA provider is equal to or greater than the RSA category A amount, then new subsection 116O(3) provides that:
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- the RSA combined component and the RSA category A component are taken to be equal to the RSA category A component;
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- the difference between the RSA category A component and that amount would, but for
new subsection 116O(3)
, have been the RSA combined component is to be applied to reduce the other components of taxable income in the order of:
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- the EIB component;
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- the CS/RA component;
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- the NCS component.
Collection of tax from friendly societies that carry on RSA business
A.1 These items amend sections 221AL(c)(ii) and 221AZE(2)(c)(ii) to ensure that net capital gains in relation to RSA business are appropriately taken into account in relation to the collection and recovery of tax from friendly societies or other registered organizations that carry on RSA business.
Credit unions, building societies and cooperative housing societies
A.2 The Bill makes some other consequential amendments to the Tax Act as a result of the Financial Sector Reform amendments.
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- These items make consequential amendments to:
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- amend the definition of credit union in subsection 23G(1); and
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- remove the definition of credit union in section 202A.
Items 63, 89 - 92, 94 -97 and 104
A.1 These items make consequential amendments to:
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- remove references in the Tax Act to a building society in section 102M, paragraph 121AO(4)(b), subsection 159GP(1) and subsection 303(1); and
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- replace references to a building society with a reference to cooperative housing society in section 202A and section 218.